In the increasingly hostile battle by Anheuser-Busch InBev (NYSE:BUD) to acquire rival SABMiller (OTC:SBMRY) for $104 billion, tobacco giant Altria (NYSE:MO) has weighed in on the tie-up and sided with the maker of Budweiser.
"Altria believes that a combination of these two companies would create significant value for all SABMiller shareholders," the Marlboro Man said in a statement, and "urges SABMiller's board to engage promptly and constructively with AB InBev to agree on the terms of a recommended offer."
A sin-stock portfolio
Why would the tobacco giant care what the two brewers do? What does it get out of the deal?
Until Altria's announcement, many investors may not have been aware the tobacco company was SABMiller's biggest shareholder, a position it's had since 2002 and which it valued at around $6.2 billion in 2014.
But Anheuser-Busch was certainly well aware of the investment, as well as that of the Colombian Santo Domingo family, which together control about 41% of SABMiller's stock. CEO Carlos Brito stated, "There's no transaction without them," and admitted it went public with its merger offer to show them just how generous its 44% premium was.
A tie-up between Anheuser-Busch and Miller has been rumored many times over the years, but last month Miller announced that it had been approached by the maker of Bud, Corona, and Stella Artois. Apparently A-B made a couple of behind-the-scenes pitches to Miller of $58 and $61 per share, respectively, that were rebuffed, so it decided it needed to get the brewers' shareholders to back the effort and made a more formal public $64-per-share offer for its rival.
A need to diversify
Altria is indeed supportive, which might be more surprising to some than discovering it was such a large shareholder in the brewer. After all, it invested in Miller (as well as in wine assets through its Ste. Michelle Wine Estates) to diversify against the risks associated with tobacco. And not just legally, but also because cigarette volumes continue to shrink each year. A sale of SABMiller to Bud in an all-cash deal would leave it with little diversification since its winery position is considerably smaller, amounting to less than 2% of total revenues last year.
Additionally, Altria realized some $1 billion in dividend payouts from Miller in 2014, a significant sum of money to have roll in every year that helps support its own dividend payments.
With SABMiller contending A-B's offer was timed to take advantage of its currently lower stock price, which allows it to make an offer that's much less than the true value of the brewer, Altria's support of A-B's bid at the current advertised price seems incongruous with maximizing shareholder value.
The smoke clears
But Anheuser-Busch's latest offer wasn't just all-cash; it offers a partial-share alternative for Altria and the Santo Domingo family's BevCo, which would be able to exchange each Miller share they own for 0.483969 shares of A-B that would be unlisted.
The brewer specifically said the latest bid is an effort to sway Altria and BevCo to support the offer because it allows them to maintain a diversified investment in the industry. Perhaps as important, it also enables Bud to make the higher bid.
Anheuser-Busch is already stretching itself thin by making this huge acquisition, as it has some $43 billion in net debt on its balance sheet that mostly came from the merger of Anheuser-Busch and InBev in 2008, but also from its acquisition of Grupo Modelo last year. Miller, in contrast, has net debt of around $12 billion.
SABMiller is also working to convince Altria and BevCo the deal isn't in their best interests, releasing early its financial performance showing that growth is accelerating. It also updated them on its cost-cutting program that seeks to generate $1.05 billion in savings by March 2020, more than twice the amount it previously targeted when it said it wanted to save $500 million by 2018.
It's clear Altria needs to maintain its investment in breweries to diversify risk. A combined A-B/Miller could offer it a higher dividend yield than the current 3% SABMiller offers (A-B yields 4%), and with respective payout ratios of less than 50% versus over 60%, respectively, there is still room for dividend growth, too.
It makes sense for Altria to remain very in tune to what both of these brewers have to say, and backing Anheuser-Busch InBev's bid can allow it to offer investors smoking returns in the future.