Cigarette and tobacco products maker, Altria Group Inc. (NYSE: MO) is one of the largest stakeholders in global beer giant SABMiller and stands to reap strong profits from its past investments in SABMiller. Altria’s core business is manufacturing and selling cigarettes, cigars and smokeless tobacco products but the global tobacco industry is facing tougher regulations in response to anti-tobacco campaigns. Altria also produces blended table wines and champagne, so management is familiar with alcohol products.
SABMiller: $28 Billion is a major Windfall for current $MO Shareholders
Altria Group first established a position in SABMiller in 2002 and currently owns a 27% stake in the company that is worth over $28 billion. The stake was valued at approximately $6.3 billion as of December 31, 2014. BevCo currently owns a 14% stake in SABMiller.
As background: In mid-September 2015, reports started to surface that brewing behemoth Anheuser-Busch InBev (BUD) was considering acquiring its UK based global rival, SABMiller. A few weeks later, AB InBev made an initial offer of $58.19 per share which was quickly rejected by SABMiller. AB InBev then made offers of $61.26 and $64.55 per share but SABMiller management rejected each of those offers which valued the company at about $100 billion, citing undervaluation and that the offers from AB InBev took advantage of SABMiller’s slumping share price. AB InBev then raised its offer to $67.90 per share, which SABMiller agreed to on October 12, 2015, with the condition that SABMiller’s largest shareholders Altria Group and BevCo had to agree to the terms.
Part of the Deal
As part of the deal, Altria and BevCo will receive $60.23 per share in stock (a partial share alternative of 0.483969 restricted shares of AB InBev) and $5.85 in cash for each SABMiller share held – about $2.5 billion in free, non-taxable cash which the high cash-flow company could likely use to offer a special one-time dividend to shareholders after the merger goes through.
AB InBev raised the cash portion by 50% to help push acceptance of the deal. The deal values SABMiller at approximately $104.2 billion. AB InBev has a deadline of October 28, 2015, to make a firm offer to SABMiller. The acquisition is expected to face tough scrutiny from antitrust regulators in both the United States and United Kingdom so AB InBev is on the hook for a $3 billion breakup fee if the deal does not close. AB InBev is actively pursuing bridge loans from banks and considering the issuance of bonds to fund the acquisition, which is expected to close in 2016 at the earliest.
While Altria and BevCo receive less cash and most of their stake in shares, and less of a premium than other SABMiller shareholders, the deal is favorable to Altria and BevCo because the low cash – high stock structure allows Altria and BevCo to not pay any capital gains tax. Altria and BevCo will also have a higher stake in the combined company with Altria owning about 11% – so there continues to be growth upside for the future, along with non-tobacco diversification. As part of the partial share offer, Altria and BevCo agreed to a 5 year lockup period on the restricted shares they will received if the deal goes through. At the end of the lockup period, all restricted shares will convert to regular shares of the combined company on a 1-to-1 basis with equal voting rights, dividend rights and director nomination rights as all other shares of the combined company.
Altria and BevCo stand to receive a 33% premium on SABMiller shares based on their pre-deal closing price of $44.93 on September 14, 2015, the day before rumors of an acquisition were released. SABMiller shareholders will receive a premium of 50% over said closing price because it is an all-cash offer.
Shares of Altria were trading at $52.45 on September 14, 2015, and climbed about 16% to $61.05 as of market close on October 23, 2015, in response to AB InBev’s interest in acquiring SABMiller.
Altria has a solid history of increasing annual dividends which currently stand at $2.26 per share and give the company a dividend yield of 3.85%. SABMiller offers a dividend yield of 2.05% to its shareholders including Altria, which uses the SABMiller dividend income to support coverage of its own dividend. AB InBev offers a dividend yield of 3.89%, so the merged entity could offer a higher dividend yield than SABMiller’s 2.05%, and this could boost dividends for Altria shareholders.
Altria’s choice to go with the partial share alternative and less cash is in line with the long-term interests of shareholders who would rather retain a bigger stake in the merged entity than pay billions in capital gains taxes to the government. Management noted that a combined AB InBev and SABMiller will gain from strong operational and marketing synergies, and be better positioned globally to control product pricing.
The acquisition gives AB InBev access to more countries in Latin America and Asia where SABMiller holds sway over AB InBev, and entrance into Africa. Industry experts noted that Africa’s beer consumption is expected to grow on an expanding middle class and higher demand for safely-brewed beers. Altria’s 11% stake in the combined entity gives Altria shareholders indirect exposure to the beer industry through a company that will control approximately 31% of the global beer market and offer over 350 brands of beer. The combined company would control approximately 70% of the beer industry in the US and approximately 37% of the beer industry in China.
The voting and director nomination rights after the lockup period are a positive for Altria shareholders that gain long-term leverage over the fate of future deals impacting the 11% stake.
Research firm Mintel’s global drinks analyst expects SABMiller to exit its 2007 joint venture, MillerCoors LLC, with Molson Coors Brewing Co. as an early regulatory, anti-competitive concession to help push the deal through. SABMiller owns a 58% stake in MillerCoors and Molson Coors Brewing owns the remaining 42%. Molson Coors Brewing has the right to buyout SABMiller’s stake should the latter get acquired by AB InBev.