SABMiller/AB InBev: Aligned conditions may have aided approach - bankers
* Pepsi and Coca-Cola bottling partnerships may pose problems
* JV Partners, major peers seen as potential divestment buyers
* Big cash consideration could help against SAB defence moves
A number of developments in the beer industry have helped align the stars for AB InBev [EBR:ABI] to finally make an approach to SABMiller [LON:SAB], sector bankers and SAB investors said.
Low debt costs, a slowdown in mainstream Western beer markets and existence of potential buyers for divestments could aid deal talks.
It was confirmed on Wednesday by both companies that AB InBev intends to submit a proposal to acquire SABMiller.
Key hurdles to a deal include ABI having to manage its bottling partnership with Pepsi [NYSE:PEP] against SABMiller’s partnership with Coca-Cola [NYSE:KO]; finding a way for 27% SAB owner Altria to sell out without triggering tax implications; and antitrust risk mainly in China and North America, bankers said.
Analysts have suggested a deal could be done with a 40/60 stock/cash split, according to reports. This would allow SAB investors to benefit from cost cutting measures and deal synergies, a minority SAB investor said. However, this investor said they would likely sell their stock in the combined company once synergies were fully realised.
But, ABI historically has not shied away from using as much cash as possible for an offer, the first sector banker said. A cash offer would provide shareholders a welcome way to exit the stock in the face of a slowdown in mature beer drinking markets and a toughening outlook for organic growth, a second minority SAB investor said.
A majority cash offer might also help make it difficult for SAB to look for a merger with Diageo [LON:DGE] or Heineken [AMS:HEIA] as alternatives to ABI’s approach, the second banker said. “My guess would be they will put up as much cash as possible,” the first banker said. Raising funds from its lending syndicate should not be a difficult task, he said. Low borrowing costs seems like a key deal driver, the second banker said.
SABMiller’s two major investors own about 40% of the company. Behind Altria, Columbia’s Santo Domingo Group has an approximate 14% stake. The views of these shareholders are considered key for negotiations.
SABMiller director Alejandro Santo Domingo Davila is no stranger to the AB InBev circle, the second banker said. He noted Santo Domingo and AB InBev’s Alexandre Van Damme were both on the board of D.E. Master Blenders. Santo Domingo may be happy to roll his SAB investment over into ABI via a stock component, he speculated.
For Altria to exit, it might first require other investment opportunities to be lined up, the first banker said. On its website, Altria notes earnings from its SAB stake have grown at a compound annual growth rate of 10.9% from USD 600m in 2009 to over USD 1bn in 2014. It may wish to stay in the newco, the banker suggested.
Despite synergies and cost cutting opportunities on offer, minority investors might want clarity on organic growth potential if there is a large share component, the second minority shareholder said. The deal would mean ABI would no longer be able to expand inorganically in beer, he noted.
An interesting dynamic is activist investor Nelson Peltz’s earlier calls for PepsiCo to be split along soft drink and snack lines, the first banker said. Following SAB, the next move for ABI would have to be in non-beer drinks, meaning the soft drink arm of Pepsi could be an attractive target, he said. ABI has a bottling contract with Pepsi that can expire at the end of 2017, given two years’ notice is provided.
ABI’s relationship with Pepsi and SAB’s relationship with Coca-Cola are key factors that will need work in deal negotiations, the first banker said. Unwinding one or the other could be a complex operation.
In 2014 SAB combined its coke bottling operations in Africa with Coca-Cola. SAB owns 57% of Coca-Cola Beverages Africa alongside Gutsche Family Investments (31.7%) and The Coca-Cola Company (11.3%). One option would be for Coca-Cola to buy SAB’s holding, the first banker said.
In its annual report, SABMiller notes a change of control would give Coca-Cola certain rights under its bottling agreements with various subsidiaries of the company. It also notes the same in certain circumstances for joint ventures in China, with China Resources Enterprise; in the US with Molson Coors [NYSE:TAP], and in Turkey where it has minority protection rights for its 24% in Anadolu Efes [IST:AEFES].
China Resources and Molson Coors would be the front-runners to buy SAB’s stakes in their respective JVs, the bankers said. Otherwise, large sector peers would likely be interested, they said.
Heineken in particular may be interested in SABMillers 58% rights in MillerCoors, the second banker said. Carlsberg [CPH:CARL] could show interest as a way of breaking the US market, but is facing a series of problems including a cost-cutting programme and loss of key executives, he noted.
Japanese players Asahi [TYO:2502] and Kirin [TYO:2503] may also be interested in the MillerCoors stake, as well as the 49% stake in China Resources Snow Breweries, the first banker said.
Meanwhile SAB’s relationship with Groupe Castel in Africa might not be as big a hurdle to overcome, the bankers said. Castel owns 38% of the majority of SABMiller’s African operations, which was exchanged for a 20% stake in the French drinks company. ABI would primarily just need to tread carefully in not altering the close relationship Castel has with SAB, the second banker said.
Both SAB and ABI declined to comment.
Vivendi unlikely to exert influence over Telecom Italia board in short term
* TI’s board expansion proposal could be “last resort” strategy
* Vivendi could advocate board reshuffle at annual meeting
Vivendi [EPA:VIV] would likely struggle to gain influence over Telecom Italia’s [BIT:TIT] board in the short term even if it reached a 20% stake in the Italian group, according to a corporate governance lawyer, an industry banker and a person familiar close to Telecom Italia.
Vivendi declined to comment on speculation surrounding a possible stake increase in Telecom Italia. A person familiar with Vivendi did not rule out the company could further increase its stake in the telco, citing recent comments made by Chairman and CEO, Vincent Bolloré.
Vivendi, which currently holds a 15.5% stake in TI, breached an important threshold when it crossed the 10% mark, as beyond this threshold it is entitled to force the board to call a shareholder meeting, the lawyer explained.
But Vivendi, which currently has no TI board seats, is unlikely to use this right either to submit to shareholders a proposal to expand the board or change board members, as both routes entail high execution risks and represent a U-turn from the friendly approach it has adopted so far, the lawyer believed.
Telecom Italia’s bylaw states that the board of directors can house a minimum of seven members and a maximum of 19. Currently it is made up of 13 members, of which 11 are considered to be independent with the remaining two being CEO Marco Patuano and Chairman Giuseppe Recchi. The number of members shall remain unchanged until a shareholders’ meeting decides otherwise.
There are other friendlier options Vivendi can pursue to tighten its grip on TI’s board, the lawyer and banker said.
These include promoting the replacement of some of TI’s independent directors with its own representatives (co-optazione) or wait for the annual general meeting next spring to propose the board expansion, they said.
Neither of these options would have a significantly higher prospect of success by Vivendi increasing its current stake to around 20%, as has been rumoured in the press, they said.
At 20% Vivendi would still struggle to control a TI shareholder meeting, meaning that putting forward the proposal of expanding the board at the annual meeting would still be risky, the lawyer noted.
Former controlling shareholder, Telco, has been outnumbered by institutional investors in the recent past despite holding a roughly 22% stake, he said. In recent years, TI shareholder meetings’ turnout has been around 54%-55% of the share capital, he added.
The replacement of an existing independent board member might be the more feasible option to get a position on the board in the shorter term, the lawyer and banker agreed. Vivendi should be able to convince at least one of the directors to resign and then gather board support around one of its representatives for replacement, they noted.
It wouldn’t be surprising if Bolloré initially proposed his daughter, Marie Bolloré, who is currently on Mediobanca’s [BIT:MB] board, the banker said. But, as Vivendi influence over the board gathers pace, Vivendi is likely to turn to super-partes figures, with a strong track record and international standing, he noted.
This banker argued that pushing for the expansion of the board would be used as a “last resort” strategy by Vivendi and suggested instead that the annual meeting could be the right opportunity for the group to advocate a board reshuffle.
Vivendi could have an argument in saying that independent directors originally backed by Telco should step-down, the banker said. Besides Patuano and Recchi, eight of the remaining 11 directors where backed by Telco when they were appointed in 2014 for a three-year mandate.
The annual meeting would be the first occasion for Vivendi to submit this proposal unless the board calls an extraordinary meeting before, the banker said. Telecom Italia’s next annual shareholder meeting is scheduled for 25 May 2016.
Meanwhile, Vivendi is likely to have engaged in discussions with TI’s management over the company’s strategy, the banker and the person close to TI said. But these conversations are still at a very preliminary stage, the person added.
While Vivendi's intentions are hard to read, building a position in TI could be a way to get a strong foothold in a telco group that is likely to be a target rather than a consolidator in the expected cross-border consolidation of the European industry in coming years, the banker suggested. Vivendi could take an active role in pushing TI into a deal, he added.
In the run up to the consolidation wave, Vivendi might want to have TI focusing on deleveraging and strengthening its fibre network to increase the company’s value, the banker said.
Meanwhile, with the conversion of TI’s savings share into ordinaries once again in the spotlight, Vivendi could be looking to increase its stake to compensate for the dilution coming from the transaction, two industry bankers believed.
TI chairman Recchi previously publicly stated that the shares conversion would not be on the agenda of the telco’s 24 September board meeting.
Spokespeople for Telecom Italia and Vivendi declined to comment.
Stocks Fall as Fed Leaves Interest Rates Unchanged
Mood cautious as officials flag concerns about global weakness
U.S. stocks ended mostly lower, as investors welcomed continued easy-money policies but remained cautious as central bank officials noted concerns about global market turmoil.
The Federal Reserve left short-term interest rates unchanged after weeks of market-churning debate at the central bank about whether it was time to end an era of near-zero rates. Many investors remained cautious, however, as central bank officials noted concerns about weakness in global economies and markets.
The Dow Jones Industrial Average fell 0.4%, after gaining as much as 194 points in the wake of Fed announcement. The S&P 500 slipped 0.3% while the Nasdaq Composite edged up 0.1%.
Investors around the world have been closely watching the central bank’s decision on short-term rates, which have been near zero since the financial crisis in a bid to stoke growth and borrowing. That stance has helped propel a six-year-long bull market in stocks and bonds.
Traders signal offers in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange on Thursday morning.
Traders signal offers in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange on
But expectations of a rate increase on Thursday had diminished in recent weeks amid a stumble in global financial markets. Stocks rose this week on anticipation that the Fed would stand firm.
“Much of the reaction was done leading up to it,” said Jim Paulsen, chief investment strategist at Wells Capital Management, which manages $351 billion. “People decided over the last couple of weeks that the Fed wasn’t going to raise rates. So by the time it was announced, for the market it wasn’t hugely different than what was prepared for.”
U.S. government debt prices rose, pushing the yield on the 10-year Treasury note down to 2.215% compared with 2.27% before the Fed’s announcement. It was 2.301% Wednesday.
The dollar tumbled to a three-week low against the euro and slipped against the yen. Higher rates in a country tend to attract investors to that country’s currency, lifting its value relative to other currencies.
Fed officials have been signaling for months they plan to raise rates this year after cutting them to exceptionally low levels in December 2008 in response to the financial crisis.
A large majority of Fed officials still believe the central bank will raise rates before year-end, but the central bank in Thursday’s statement showed a bit less conviction on that point. In June, 15 of 17 officials said they expected to raise rates this year, according to official projections released with the Fed’s policy statement; on Thursday the number of people who expected to raise rates this year slipped to 13.
Many investors now expect the Fed to hold off on raising rates at all until 2016.
Fed-funds futures, used by investors and traders to place bets on central-bank policy, showed bettors see a 25% likelihood of a rate increase for the October 2015 policy meeting, according to data from CME Group. The odds were 37% before the Fed announcement and 50% a month ago.
The odds of a rate increase at the December 2015 meeting were 54%, compared to 62% before the Fed’s decision and 73% a month ago, according to CME.
Some traders worried that the Fed decision reflected officials’ concern about economic weakness.
“They must have seen something out here that’s really scary,” said Floyd Upperman, an independent trader in Laguna Niguel, Calif. Mr. Upperman said he remained cautious even though the ultralow rates that helped fuel a six-year bull run in stocks would continue for at least a couple more months. “The uncertainty is still there.”
Mr. Upperman said he would wait for the dust to settle before trading.
“There’s always the thought: Does the Fed know something we don’t know?” said David O’Malley, chief executive of Penn Mutual Asset Management. Although he said that rock-bottom interest rates are likely to support stocks in the short turn, Mr. O’Malley is betting against stocks because he believes corporate-earnings growth will be tepid.
Still, others said the decision to keep rates at zero bolstered the stock market’s allure. “Stocks are still very attractive relative to the alternatives, relative to holding cash and relative to fixed income,” said Hank Smith, chief investment officer at the Haverford Trust Co., which oversees $8.2 billion.
Many called Thursday’s announcement anticlimactic. John Augustine, chief investment officer of Columbus, Ohio-based Huntington Bank, said there were “groans and mostly just disappointment” in his office following the Fed decision.
“We were all waiting for the start of a new era…and it now looks like that’s pushed back to next year,” he said. Mr. Augustine said the dovish statement “breathes new life” into high-yielding stocks such as utilities and real-estate investment trusts, and that he will likely buy more stocks in those sectors. Utilities took off after the Fed statement and are up 2.3% Thursday, leading the S&P 500 higher.
Earlier, global markets were mostly lower. The Stoxx Europe 600 lost 0.2%. The Shanghai Composite Index oscillated before ending the session down 2.1%, while shares in Japan climbed for a third straight day.
Closing Market Summary: Stocks Slip While Fed Holds
The stock market ended the Thursday session on a lower note after the Federal Reserve made no changes to its policy stance. The S&P 500 shed 0.3% while the Nasdaq Composite (+0.1%) outperformed throughout the day.
FOMC days are known for afternoon volatility and today's affair lived up to that billing even though the policy statement from the Federal Reserve was virtually a carbon copy of the previous directive. The FOMC acknowledged positive labor market conditions in the U.S., but indicated that concerns related to an economic slowdown in China have outweighed the domestic positives. Ms. Yellen stressed that these developments have weighed on the inflation outlook, contributing to today's decision to maintain status quo.
Furthermore, Ms. Yellen emphasized that the expected rate path is more important than the first rate hike, indicating that the Committee expects to see rate normalization by 2018. Hearing ‘2018' in that context was music to the market's ears, inviting a stampede of buyers in stocks while Treasuries spiked to highs with the 10-yr yield falling ten basis points to 2.20%.
The post-FOMC move higher was followed by a dive to new lows, with the reversal paced by the financial sector (-1.4%), which settled in the red as bank stocks responded to rates remaining lower for longer. The sector accelerated its decline as Fed Chair Yellen responded to a question about the possibility that the U.S. falls into a Japan-like deflationary trap. To little surprise, Ms. Yellen said that such a scenario is not anticipated at this time.
Meanwhile, another influential group—technology (-0.7%)—also weighed on the broader market, ending near the bottom of the leaderboard after struggling throughout the session. The top-weighted sector was pressured by Oracle (ORCL 36.74, -1.53) as the stock lost 4.0% after its one-cent beat was not enough to dispel concerns about the company's guidance and lack of revenue growth. High-beta chipmakers also struggled with the PHLX Semiconductor Index falling 0.9%.
Elsewhere, another influential sector—health care (+0.9%)—settled well ahead of the S&P 500 with biotechnology powering the move. The iShares Nasdaq Biotechnology ETF (IBB 362.50, +7.36) surged 2.1% with the strength keeping the S&P 500 from sliding deeper into the red.
Also of note, the consumer discretionary space (+0.9%) managed to stay in the green, thanks to support from media names after Cablevision (CVC 32.51, +3.97) agreed to be acquired by Altice for roughly $17.70 billion in cash.
On the flip side, industrials (-0.5%), energy (-0.1%), and materials (-0.5%) succumbed to the afternoon selling pressure, which invited above-average volume with more than 975 million shares changing hands at the NYSE floor.
Economic data included Initial Claims, Housing Starts, Current Account, and the Philadelphia Fed Survey:
- The initial claims level declined to 264,000 from an unrevised 275,000 while the consensus expected no change at 275,000
- Over the past four weeks, the initial claims level has averaged 272,500, and weekly volatility has been minimal, suggesting a strong labor market
- The continuing claims level decreased to 2.237 mln from an upwardly revised 2.263 mln (from 2.260 mln) while the consensus expected a drop to 2.255 mln
- Housing starts declined 3.0% in August to 1.126 mln from a downwardly revised 1.161 mln (from 1.206 mln) in July while the consensus a drop to 1.158 mln
- As expected, single-family starts pulled back in August after reaching a seven-year high in July while construction levels remained strong
- Single-family starts slipped only 3.0% to 739,000 in August from 762,000 in July, and new construction is running well above its three-month (729,333) and 12-month (692,417) averages
- The current account deficit for the second quarter totaled $109.70 billion while the consensus expected the deficit to hit $112.20 billion
- The first quarter deficit was revised to $118.30 billion from $113.30 billion
- The Philadelphia Fed's Business Outlook Survey declined to -6.0 in September from 8.3 in August while the consensus expected an increase to 6.5
- That was the first reported contraction in the Philadelphia region since February 2014
- The Philadelphia region is not the only region where manufacturing activities experienced a sudden downturn. Just about all of the August regional Federal Reserve manufacturing surveys were negative, and the latest September reading of the New York Fed's Empire Manufacturing Survey reported a second consecutive sizable contraction in manufacturing activities
Tomorrow's economic data will be limited to the 10:00 ET release of the Leading Indicators report for August (Briefing.com consensus 0.2%).
- Nasdaq Composite +3.3% YTD
- Russell 2000 -1.9% YTD
- S&P 500 -3.3% YTD
- Dow Jones Industrial Average -6.4% YTD
FOMC Janet Yellen Press Conference; Conference Call.
- Inflation continues to run below expectations.
- Continue to expect this to fade over time but notes recent International developments will keep pressure on inflation.
- Continues to anticipate a raise when it sees further improvement in labor market and remains confident inflation will move back to 2%.
- Continues to expect a moderate pace of overall GDP growth.
- Unemployment participation rate still remains low for the Fed.
- Continues to see inflation negatives as transitory but will take longer than expected to dissipate.
- Notes now providing medians for people to use as measurement but it should not be viewed as a collective view.
- Lower inflation forecasts largely reflects lower energy and import prices.
- Notes events in China and emerging markets have led to further market volatility.
- Notes 4 participants moved projections but 'great majority' of participants continue to see 2015 as an appropriate time for raising rates.
- Says every meeting is a live meeting and that includes October. Says would call a press conference.
- Notes domestic economy is doing well.
- Says does not need to hit both targets before raising rates.
- Focused on China and Emerging Markets; says not surprised to see slowing in China growth as this has been expected over time.
- Bigger question is how much risk is around in the China slow down; Notes August activity highlighted some of the concerns.
- Notes watching China exchange rates.
- Fed should not be responding to up and downs of the markets; it is incumbent on the Fed to ask what is causing volatility in markets.
- Have seen some tightening of financial conditions.
- In spite of all the International headwinds the U.S. economy continues to perform.
- Says would be surprised if we never escaped ZIRP.
- Says did not seriously consider negative rates; says one participant in the committee would like to see additional stimulus.
- Sees further improvements in the Housing market;
- Notes government shutdown threats did not play a role in the current decision.
- Conference call ends.
*FED LEAVES INTEREST RATES UNCHANGED: MNI
Netflix lifting in recent trade on reports co is in talks with DIS to license Star Wars in Latin America
Manchester Utd explores $826m share sale
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Hours after announcing that it expects a rise in revenues for 2016, Premier League football club Manchester United has unveiled plans to raise as much as $826.7m.
In its filing to the US Securities and Exchange Commission, the club says it was looking to sell as much as $400m in new "Class A" shares.
It added that at the same time as the offering, existing shareholders may also sell up to 24m shares at a proposed maximum offering price of $17.73 a share. This would raise an additional $426.7m.
The club does not say which banks may underwrite the sale. Jefferies, Credit Suisse and JP Morgan led the IPO in the US in 2012.
The Glazer family still controls the club through its ownership of Class B shares that carry much greater voting power.