AB InBev could look at partial share alternative for SABMiller bid
* Initial cash default offer more likely to result in fewer share elections - independent lawyers
* Provides scope for major SAB shareholders to be paid exclusively in shares
* Bidder could attempt to make cash offer appear at premium to stock alternative
AB InBev [EBR:ABI] could be considering a partial share alternative as a way to help major SABMiller [LON:SAB] shareholders avoid hefty capital gains tax bills, it was said.
ABI is thought to be working toward a deal structure that would give SABMiller investors Altria (27%) and the Santo Domingo family (14%) the greatest ability to roll over their stakes into the combined entity to avoid large capital gains tax bills on cash profits.
A spokesperson for ABI declined to comment.
UK takeover law stipulates all target shareholders must be offered the same consideration. This means a bidder cannot offer an all share consideration to one set of target investors while offering a cash element to others.
A partial share alternative involves the bidder making an initial cash offer to all target shareholders. However, it includes a secondary option stating it will pay up to a certain amount of the overall offer by way of shares, if target shareholders elect for this alternative.
Analysts have estimated that around 40% of InBev’s offer may be in stock. Bankers previously predicted that this may be to accommodate SAB’s largest shareholders. ABI typically favours offering as much cash as possible in offer considerations, as reported. However in this case it needs to tailor the bid for Altria and the Santo Domingos.
Lawyers that have worked on these type of deal structures said a partial share alternative allows for the possibility of a small amount of target shareholders being paid exclusively in shares, if others do not opt for the share consideration. If the maximum limit for the share alternative is exceeded, then shareholders who opted for this consideration are scaled back evenly.
It is similar to the mix-and-match facility that has become more popular than the partial share alternative in recent years. However, mix-and-match deals only allow shareholders desiring an all share consideration the option if others opt the opposite way. A partial share alternative requires shareholders to positively opt for the share component, two independent lawyers noted.
The risk is that other investors may also desire a share component. The chairman of SABMiller investor Allan Gray is reported to want shares of the new entity to be listed in South Africa.
This could leave ABI in the position of trying to structure the deal so that shareholders other than Altria and the Santo Domingos are attracted enough by the cash consideration to not opt for shares.
Offering a partial share alternative is a more logical way than a mix-and-match for a bidder to attempt convincing certain investors to accept the full cash consideration, one independent lawyer said. A number of investors, particularly less sophisticated ones, tend to follow the default all cash initial offer, he said.
The bidder can attempt to have the cash offer appear at a premium to the share alternative, he said.
One recent example of a partial cash consideration being used is Carlyle’s 2014 private bid for Dealogic. In this deal, target shareholders could only opt for the alternative if they accepted all shares rather than cash.
One minority SABMiller shareholder previously told this news service he favoured an all cash offer due to his expected undesirability of the AB InBev stock post-deal. A second desired a cash-and-stock offer, but was set to sell out of the new entity once the combined entity had reached its full synergy potential. Neither indicated an appetite to receive all shares.
This differs from Platform’s [NYSE:PAH] 2015 bid for Alent [LON:ALNT]. The partial share alternative offered in this deal allows Alent shareholders to elect to receive new Platform shares in lieu of part or all of the cash consideration.
The target board could also consider only making a recommendation on the initial all-cash offer, and not on the partial share alternative, the first independent lawyer said. In this scenario it could suggest target shareholders seek their own advice on the alternative.
Part of ABI’s work would be assessing where SABMiller investors are registered due to different tax regimes, one of the independent lawyers said. This could highlight how many investors would likely stick with the full cash offer, and which might desire partial or full stock consideration.
Ferrovial’s 2006 bid for BAA highlights another structure to a partial share alternative. In lieu of an all-cash offer, target investors could opt for a stake in a newly created company in addition to a partial payment in cash. The new company would have listed on London’s AIM, holding 5% to 10% of the parent. This did not go ahead due to minimum requirements not being met.
Reports have suggested ABI could offer between 4000p to 4500p for SAB. It has been reported that ABI made an informal offer at about 4200p/share this week. ABI has a put up-or-shut up deadline of 14 October.