TheChek News Flow

Giant beer merger between Miller and Bud brewers appears unlikely

Facing a Wednesday deadline to get a deal done, ABI’s chances of accomplishing the mega-merger are just 30 percent — down from 60 percent last week, a source with direct knowledge of the situation told The Post on Monday.

The main stumbling block is price.

ABI on Monday raised its proposed takeover offer to $66.83, or 43.5 British pounds per share. It is the fourth times ABI has raised its offer as pressure mounts on SAB boss Jan du Plessis and his board.

Last week, SAB, the world’s No. 2 brewer, the maker of Lite beer from Miller and Peroni and other brands, turned down a proposed offer of $64.75, or 42.15 pounds a share.

The UK company, whose shares had fallen sharply in 2015, before ABI came a-knocking, feels the offer “very substantially” undervalues the company and that ABI is being opportunistic in trying to pick up the brewer at a discount.

SAB is said to be seeking a price closer to $76.50, or about 49.8 pounds a share.

But Brazilian-based ABI, maker of Bud Light, Corona and Stella Artois and many other brands, is said to be ready to offer no more than $67.60, or 44 British pounds.

ABI, under British Takeover Law, needs to reach a deal with the SAB board by Wednesday — or walk away for six months.

To succeed, ABI will have to win over Colombia’s Santo Domingo family, which owns 13 percent of SABMiller and would like to see a merger but will be hit hard by taxes on its investment profits as the deal is currently structured, sources said.

Even if a few large shareholders welcome an increased offer it will likely not be enough to sway a majority of the board in such a short time, sources noted.

If successful in winning over SAB shareholders, ABI will likely have to sell many US beer brands to gain regulatory approval. Many beer sector insiders feel there are few possible suitors for those brands — and that is why ABI’s proposed takeover offers are so low.

Some SAB’s board believes ABI will be back to make an offer for them in roughly a year and at that time its earnings will have improved and they can attract a much better proposal.

US judges clamp down on M&A farce

Litigation ritual that accompanies mergers benefits lawyers rather than shareholders

Apeculiar ritual occurs after almost every merger or acquisition is announced in the US. Even if the acquirer is paying a 20, 30 or 40 per cent premium above the undisturbed share price, several lawsuits will immediately be filed that breathlessly allege the target company’s board of directors breached its duties by selling up too cheaply.

Yet for virtually all transactions, this litigation is more charade than threat. The post-deal litigation kabuki has a specific choreography: all the lawsuits are consolidated into a single-class action claim. There may be a perfunctory discovery period when depositions are taken. But quickly a settlement is reached: a few lines of prose are added to the proxy document that describe the deal circumstances. (These additional disclosures are derisively referred to in the industry as “peppercorn” for their weightlessness.)

Shareholders rarely receive a nickel, but the plaintiffs’ lawyers typically get several hundred thousands of dollars in fees. This game has long been accepted as a “tax” on doing deals. But now the farce has proceeded long enough that judges in the Delaware Court of Chancery, which must typically approve these “disclosure-only” settlements, are embarrassed.

In several recent cases, the Delaware chancellors have expressed deep unease about the practice. Last Friday, the court rejected a disclosure-only settlement related to Hewlett-Packard’s $3bn acquisition of Aruba Networks.

The dilemma is as follows: plaintiffs’ lawyers get a sizeable fee for little work, companies pay a few hundred thousand dollars and, crucially, as the irreverent judge Leo Strine has put it, the board gets in exchange an “intergalactic” waiver that prevents any other misconduct claims against them from being litigated anywhere else. The arrangement benefits lawyers and companies but discourages the investigation of genuine bad behaviour.

The growing resistance in Delaware is not about discouraging all shareholder lawsuits. Rather, the judges want lawyers to focus their efforts on genuine failures in the M&A process. To make that happen, the court has made clear that in cases of bad behaviour, deep-pocketed investment banks can be held to account.

In a sensational Delaware case decided last year by Chancellor Travis Laster, the investment bank Royal Bank of Canada was found to have “aided and abetted” a breach of duty by its clients, the directors of Rural/Metro Corp. Rural/Metro was an ambulance company that was acquired by Warburg Pincus for $728m in 2011. The trial uncovered evidence that RBC had slanted its analysis and advice to secure lucrative financing assignments. The judge ordered the bank pay $76m in damages.

RBC is appealing, and its defence hinges on multiple technical legal arguments. But language in last year’s trial decision has bankers across Wall Street on edge: “The threat of liability helps incentivise gatekeepers [bankers] to provide sound advice, monitor clients and deter client wrongs,” says one.

Bankers, in an effort to limit their legal exposure, usually try to describe their duties as narrowly as possible in carefully drafted client engagement letters. The new Delaware ruling would shoot huge holes in that strategy. “In effect, the Court of Chancery’s new rule of law would require financial advisers to assume a de facto duty to supervise the board — essentially to act as the board’s overseer,” industry group the Securities Industry and Financial Markets Association warned in a brief to the Supreme Court.

The RBC case is not one-off. Goldman Sachs, Barclays, Bank of America and Credit Suisse have also taken heat from the court for their advice in prominent transactions. Those cases, importantly, have forced bankers and boards to think more consciously about conflicts of interests. Today, the practice of bundling deal financing with deal advice has effectively ended. Companies also increasingly hire multiple financial advisers so they have several points of view before selling themselves.

But the worry is that zealous plaintiffs’ lawyers, enabled by aggressive judges, will swing the pendulum too far. For banks, it is not just about losing in court but losing the pitch. One prominent litigator said: “Bankers don’t like this regime. They don’t want to invent conflicts where they don’t exist . . . The more your disclose the hell out of stuff, the more directors take their deal somewhere else”.

- 2015 deficit would be 4.5% of GDP v 4.2% in prior plan

- 2016 deficit would be 3.5% of GDP v 2.8% in prior plan

L'antitrust français ouvre un nouveau dossier dans le cadre de la fusion Numericable-SFR. Cette fois, l'autorité regarde le dossier de la fibre.

C'est la troisième fois que l'Autorité de la concurrence se saisit d'office dans le cadre de la fusion Numericable-SFR. Cette fois, le régulateur intervient «à la suite d'une plainte de Bouygues Telecom, afin de vérifier les conditions d'exécution des engagements pris par Numericable sur le déploiement de la fibre lors du rachat de SFR».

Bouygues Telecom avait noué un accord avec SFR en 2010, bien avant son rachat par Numericable. SFR déployait de la fibre, et la filiale de Bouygues participait au financement de ce réseau. Cet accord concerne 22 communes et 2,9 millions de prises (foyers ou locaux professionnels raccordables à la fibre). A date, 1,5 million de prises ont été déployées, soit la moitié du nombre prévu par le contrat. Depuis la fusion, Bouygues Telecom estime que le rythme de raccordement des immeubles a été «très fortement ralenti». Numericable-SFR estime au contraire tenir ses engagements. Le groupe a évoqué des changements de sous-traitants pour justifier certains retards en début d'année, mais les choses seraient rentrées dans l'ordre, selon lui.

La fusion entre SFR et Numericable a été soumise à de nombreuses conditions par l'Autorité de la concurrence qui cherche notamment à s'assurer que la compétition entre les opérateurs et le déploiement de la fibre ne seront pas altérés par ce rapprochement. L'Autorité de la concurrence s'était auto saisie du dossier de la Réunion, contraignant Numericable à revoir ses positions tarifaires. L'autorité a aussi procédé à des perquisitions dans les locaux de SFR, pour voir si la direction de Numericable aurait commencé à mettre en œuvre la fusion, avant le feu vert des services de Bruno Lasserre. Les procédures sont toujours en cours.

Le sujet du déploiement de la fibre est d'autant plus sensible pour Bouygues Telecom que le groupe accuse un certain retard dans ce secteur, face à Orange et Numericable-SFR. La filiale de Bouygues s'est engagée à déployer 2 millions de prises à la fin 2015. La fibre s'avère un formidable outil de conquête de parts de marché et ne pas en disposer devient un handicape dans un marché en pleine réorganisation. En août Bouygues Telecom avait porté l'affaire devant le tribunal de Commerce de Paris.

M&A news: EMC +5.2% (EMC confirms it will to be acquired by Dell for $67 billion in cash and stock deal; valued at $33.15 per share).

Select metals/mining stocks trading higher: HMY 6.3%, AU +6.1%, AUY +5.2%, HL +3.2%, GDX +2.7%, ABX +2.5%, GG +2.5%, NEM +2.5%, GOLD +1.8%, BBL +1.3%.

Other news: CANF +16.7% (granted Orphan Drug Designation by the EMA for CF102, for the indication of hepatocellular carcinoma), OREX +10.7% (Baupost Group discloses 17.17% passive stake in 13G filing), ESPR+10.6% (on LLY news), CLSN +8.7% (Announces Impressive Preclinical Data for its GEN-1 IL-12 Immunotherapy in Combination with Avastin and Doxil), CETC +8.2% (continued strength), PSTG +6% (favorable commentary on Friday's Mad Money), RDUS +4.3% (announces positive top-line data from the Phase 3 ACTIVE trial), FRO +4.1% (still checking), LL +3.8% (continued strength), ONCE +3.4% (presents additional data from the Phase 3 pivotal trial as well as continued durability data from an earlier Phase 1 study of SPK-RPE65), INOV +2.8% (PMorgan Chase discloses 11% passive stake in 13G filing), SDRL +2.3% (still checking), FCAU +2.1% (Ferrari details plans for pending IPO, has applied to list on the NYSE under the symbol RACE; IPO to consist of 17,175,000 shares, expected price between $48.00-$52.00), PMTS +1.9% (IPO from Friday), TSLA +1% (to release software with autopilot this week), CS +0.9% (reports out that plans to lower costs by 7-10%), PSX +0.9% (announces 2016 capital budget of $3.6 bln, approves $2 bln increase to its share repurchase program), MON +0.3% (enters into a $3 bln accelerated share repurchase program).

Analyst comments: NXPI +1.6% (light volume; resumed with a Overweight at Morgan Stanley; tgt $115), XOM +1.3% (upgraded to Equal Weight from Underweight at Barclays), NTAP +1.2% (upgraded to Outperform at Robert W. Baird; tgt raised to $40), GS +1.1% (upgraded to Buy from Neutral at Citigroup), AAPL +0.8% (target raised to $162 from $155 at Morgan Stanley)

Select metals/mining stocks trading higher: HMY 6.3%, AU +6.1%, AUY +5.2%, HL +3.2%, GDX +2.7%, ABX +2.5%, GG +2.5%, NEM +2.5%, GOLD +1.8%, BBL +1.3%.

Other news: CANF +16.7% (granted Orphan Drug Designation by the EMA for CF102, for the indication of hepatocellular carcinoma), OREX +10.7% (Baupost Group discloses 17.17% passive stake in 13G filing), ESPR+10.6% (on LLY news), CLSN +8.7% (Announces Impressive Preclinical Data for its GEN-1 IL-12 Immunotherapy in Combination with Avastin and Doxil), CETC +8.2% (continued strength), PSTG +6% (favorable commentary on Friday's Mad Money), RDUS +4.3% (announces positive top-line data from the Phase 3 ACTIVE trial), FRO +4.1% (still checking), LL +3.8% (continued strength), ONCE +3.4% (presents additional data from the Phase 3 pivotal trial as well as continued durability data from an earlier Phase 1 study of SPK-RPE65), INOV +2.8% (PMorgan Chase discloses 11% passive stake in 13G filing), SDRL +2.3% (still checking), FCAU +2.1% (Ferrari details plans for pending IPO, has applied to list on the NYSE under the symbol RACE; IPO to consist of 17,175,000 shares, expected price between $48.00-$52.00), PMTS +1.9% (IPO from Friday), TSLA +1% (to release software with autopilot this week), CS +0.9% (reports out that plans to lower costs by 7-10%), PSX +0.9% (announces 2016 capital budget of $3.6 bln, approves $2 bln increase to its share repurchase program), MON +0.3% (enters into a $3 bln accelerated share repurchase program).

Analyst comments: NXPI +1.6% (light volume; resumed with a Overweight at Morgan Stanley; tgt $115), XOM +1.3% (upgraded to Equal Weight from Underweight at Barclays), NTAP +1.2% (upgraded to Outperform at Robert W. Baird; tgt raised to $40), GS +1.1% (upgraded to Buy from Neutral at Citigroup), AAPL +0.8% (target raised to $162 from $155 at Morgan Stanley)

deal will be achieved. Last week Altria (27% owner) said it supported the offer, but

BevCo voted against, even though ABI said in its conference calls that the offer had

been designed “with and for” these holders. We don't think it would have

approached SAB in the first place without being reasonably confident it would have

the backing of the 2 key shareholders. Therefore we would expect BevCo to be

supportive at a revised price. We suspect both Altria and BevCo would have been

aware in advance that SAB was likely to announce an increased savings plan

(which it did on Friday).

* If both Altria and BevCo support a revised offer we think it will be hard for the

board to reject – This is especially the case as it is likely that Altria and BevCo

would be supporting an equity offer at a lower price than the cash offer. As we have

consistently said we don’t believe SAB has many defences, beyond pointing out its

growth prospects and savings programs.

* What happens next? There could be news at any time, and we do expect the two

sets of advisors will have talked over the weekend. By the Oct 14 deadline, SAB

could either accept an offer from ABI, or agree an extension, allowing talks to

continue, perhaps for a couple of weeks. We believe this is the most likely scenario,

even if BevCo hasn’t agreed to an offer by then, as otherwise SAB shareholders

would be at risk of seeing the recent upward move in SAB’s share price reverse.

However, if SAB neither accepts an offer nor agrees to an extension, ABI is forced

to either make a hostile offer, or walk away for a minimum of six months.

* M&A in HPC – In HPC, we think RB is the most likely to pursue game-changing

M&A in the near term, with Pfizer Consumer Health a credible target (See Now

What?). Our pharma colleagues think that Pfizer is ultimately a seller of that

business. Edgewell (the former Energizer Personal Care business) looks to us to be

a potential target for a strategic buyer once the poison pill expires (Dec 2015). While

we do not see an acquisition of the whole business providing a clear strategic fit

with any of the European companies we cover, some of Edgewell’s assets could

potentially be of interest to some of them.