SABMiller/AB InBev: Spinoffs of the megadeal

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As a country you know you’re having a bad time when the best thing that’s likely to happen to you all year is a great big beer merger.

At some stage in the second half of this calendar year, AB InBev will complete its US$108bn purchase of SABMiller. When it does, it will trigger a cornucopia of delights for our economy.

The most obvious is the $12bn share of the spoils that accrues to SA shareholders, who account for around 11% of the total shareholder base. That inflow of foreign currency will go a long way towards countering whatever downward pressure there is on the rand in the coming months.

But it doesn’t end there — far from it. There’s the R1bn development fund to be set up under the auspices of the economic development department to create opportunities for small businesses.

There are also the fees to be paid out to sundry advisers, including lawyers, bankers and public relations personnel. The management team is set to walk away with a whopping $2.1bn, led by CEO Alan Clark with an eye-watering £55m (R1.2bn). And let’s not forget the JSE listing, a gift that will keep giving in the years ahead when we’ve all forgotten who SAB was.

And all from a deal that makes less operational sense by the day and can only be justified by the access to cheap finance for sharp cost-cutting operators such as the guys at AB InBev.

But perhaps the really great part of this deal, and a part that has largely been overlooked, is the hefty contribution to the SA Revenue Service (Sars) it is likely to generate. Based on some more or less imaginative assumptions, the transaction could trigger capital gains tax (CGT) of as much as R9bn.

On the most conservative assumption (2% of SABMiller shareholders are individuals holding the shares since the London listing), the CGT inflow will be over R3bn. That will make AB InBev SA’s largest source of tax this year.

The size of the potential CGT contribution reflects the exceptionally strong growth in the share price since 2001 (when CGT was introduced) and the fact that a chunk of the SA shareholder base comprises long-term holders of the share.

Unfortunately for Sars, big shareholders such as the Public Investment Corp and Allan Gray are holding the shares on behalf of pension funds and unit trusts. They are exempt from CGT. But non-pension funds and individual investors will have to hand over an effective 16% of the profit they make on AB InBev’s £44 offer.

Calculating the profit for CGT purposes begins in 2001. This is good news for one extremely long-term shareholder who recalls buying some SAB shares when they were R2. He will escape liability for those very early years.

In the first few months of 2001, SAB was trading at around £5, up only slightly from the 428p at which it had listed on the London Stock Exchange in March 1999. Though it was making strides in Eastern Europe, Africa and China, the company was getting little backing from global institutional investors, who tended to regard it as a bit of an African upstart. That all changed with the Miller transaction in 2002.

By giving it access to US dollar earnings, the Miller deal dramatically changed the group’s growth trajectory, putting it on a course that reached its inevitable conclusion last November. That was when the world’s number one beer group, AB InBev, offered a 50% premium on the ruling SABMiller share price to create a behemoth that would dominate the global marketplace.

In 1999, SAB had a market cap of £3.5bn and its share register was dominated by South Africans. AB InBev’s £44/share offer gives SABMiller a market cap of around £74bn.

The SA share of the register has shrunk to around 11% ( around 185m shares). Remarkably, that 11% is worth over £8bn. (Since the move to London, huge numbers of shares have been issued but there have been no share splits or consolidations.)

Getting back to Sars and its gains from this mega merger … As with all personal tax matters, one can only make estimates based on assumptions.

The first difficulty is getting a handle on the average holding period for SABMiller shares. Precise information is not available but anecdotal evidence and company sources suggest the vast majority of SA shareholders are long-term holders. For CGT purposes, if we assume the price was around £5 in 2001, the base year, we get to a profit (or capital gain) per share of a remarkable £39 on AB InBev’s £44 offer.

Let’s finally assume less than half of the long-term SA shareholder base comprises private individuals (equivalent to, let’s say, 4% of all shareholders) — and we get to a possible CGT gift of around R9bn.

Even if the private shareholder portion was just 2% of the total, this would make AB InBev the country’s single most important source of tax in 2016. And for that we must thank not only the guys from AB InBev and the team that drove SABMiller to such successful heights but also the monetary policy wonks in Europe and the US.

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