By Saabira Chaudhuri And Tripp Mickle 

SABMiller PLC rejected a takeover proposal from Anheuser-Busch InBev NV on Wednesday valuing it at up to $104 billion in cash and stock, the latest salvo in what has become a tense negotiation between the world's No. 1 and No. 2 brewers.

A combination of the two companies would create a beer behemoth with unrivaled scale and reach, bringing AB InBev brands like Budweiser and Stella Artois, which have been languishing in key markets, into new corners of the globe.

SABMiller has a major presence in Africa and significant market share in Colombia, Ecuador, Peru and Australia, while AB InBev is strong in Canada, Mexico, Brazil, Argentina and parts of Western Europe.

The deal faces many hurdles, from likely antitrust scrutiny to tensions between SABMiller's two largest shareholders, which together control 41% of the company.

U.S. tobacco group Altria Group Inc., the maker of Marlboro cigarettes, owns more than 25% of the brewer and has said it would support a deal at or above AB InBev's proposed price of GBP42.15 ($64.2) a share--a 44% premium over SABMiller's Sept. 14 closing price, the day media speculation about a potential takeover began to circulate.

But Altria's three representatives on SABMiller's 16-member board were the only ones not rejecting the proposal Wednesday, which the board said "still very substantially undervalues SABMiller, its unique and unmatched footprint, and its stand-alone prospects."

The Santo Domingo family of Colombia, which owns about 15% of the beer giant through its BevCo Ltd. investment vehicle, sided with the rest of the board. BevCo didn't immediately respond to a request for comment.

To make the proposal more palatable to SABMiller's top two shareholders, AB InBev included an option that would let them be paid mostly in stock, albeit at a lower valuation. This alternative would offer tax and accounting advantages and give both Altria and the Santo Domingos an opportunity to keep a stake in the combined company.

Alejandro Santo Domingo, who is on the board of SABMiller, is likely to seek a board seat at the combined company, a person familiar with the matter has said. One thing that could work in AB InBev's favor, according to this person, is that Mr. Santo Domingo personally knows the partners of Brazilian private-equity firm 3G Capital Partners LP, which was started by AB InBev's shareholders.

Wednesday's announcement marks the first time AB InBev made public the terms of a proposal to acquire SABMiller, which it has been eyeing for years. AB InBev said it has made two prior written proposals in private to the brewer--the first for GBP38 a share in cash and the second, on Monday, for GBP40 a share in cash.

Belgium-based AB InBev has until noon EST on Oct. 14 to make a firm offer for SABMiller or walk away for at least six months. It noted that Wednesday's proposal doesn't constitute a firm offer.

The public proposal was designed to pressure SABMiller's board into engaging in talks, AB InBev Chief Executive Carlos Brito told analysts Wednesday. He encouraged SABMiller shareholders to review the proposal and persuade SABMiller's board to engage.

Mr. Brito said AB InBev doesn't plan to pursue a hostile bid at this point and would still prefer to secure a "recommended transaction," but to achieve that, it needs SABMiller's board to cooperate. To date, he said, "their board is going to great lengths to avoid engagement."

For its part, SABMiller said AB InBev had timed its approach to take advantage of SABMiller's recently depressed share price, that the structure of the proposals discriminates against some SABMiller shareholders, and that AB InBev hasn't offered it comfort on the significant regulatory hurdles in the U.S. and China.

In a separate release Wednesday, Altria said it supported the current proposal, including the share alternative, and recommended that SABMiller's management engages "promptly and constructively" in talks.

SABMiller shares closed 0.3% higher at GBP36.33 in London, while AB InBev's shares rose by 0.6% in Brussels.

Combined, the two companies would generate annual revenue of $64 billion and earnings before interest, taxes, depreciation and amortization of $24 billion.

Research firm Euromonitor estimates the combined company's market share would be 29% after likely divestments, giving it a 20-percentage-point lead over the next-biggest brewer, Heineken NV.

Because of the global reach of AB InBev and SABMiller, they likely will have to seek antitrust clearance from jurisdictions around the world, a process that could easily take a year.

The biggest regulatory hurdle is in the crucial U.S. market, where AB InBev already has a roughly 45% market share and London-based SABMiller controls a further 25% through its MillerCoors LLC joint venture with Molson Coors Brewing Co.

Another potential regulatory headache is China, where AB InBev had an estimated 14% volume market share last year, according to Euromonitor. Chinese authorities could require the brewer to exit SABMiller's joint venture with China Resources Enterprise Ltd., which has 23% of the market and produces the top-selling Snow brand.

In Wednesday's statement, AB InBev said it is "committed to working proactively with regulators" and said in the U.S. and China in particular it would "seek to resolve any regulatory or contractual considerations promptly and proactively."

In an appeal to the original home of the former South African Breweries, AB InBev said a combined company would establish a secondary listing on the Johannesburg stock exchange and have a local board there.

AB InBev's last deal--a $20.1 billion deal for the Mexican brewer Grupo Modelo in 2012--partly backfired on the company in the U.S., its most profitable market. The U.S. Department of Justice forced AB InBev to sell a Mexican brewery to Constellation Brands Inc., along with permanent rights to peddle all of Modelo's beers in the U.S.

The deal has benefited AB InBev, which last year generated sales of $4.6 billion in Mexico, a market that previously contributed little to its bottom line. But it also gave birth to a formidable rival in the U.S.: Sales of Corona and Modelo Especial have been growing at a double-digit pace in the U.S., cutting into sales of AB InBev's leading brands Budweiser and Bud Light.

Anupreeta Das contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Tripp Mickle at Tripp.Mickle@wsj.com

 

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

October 07, 2015 17:34 ET (21:34 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
Altria (NYSE:MO)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Altria Charts.
Altria (NYSE:MO)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Altria Charts.