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InBev-SABMiller deal faces fight in South Africa

February 25, 2016
Consumer Packaged Goods

South Africa may well become the biggest roadblock for Anheuser-Busch InBev NV’s proposed takeover of SABMiller PLC, a $108 billion deal that would combine the word’s two biggest brewers.

A key challenge is coming from places like the farm owned by Annemarie Filmalter, which has supplied about 50 tons of hops a year to SABMiller for more than a decade. She said the takeover has unsettled her half-dozen employees, who this week are headed to the fields near the country’s southern coast to harvest hops. “People worry about jobs,” Ms. Filmalter said.

Concerns like these have led the Congress of South African Trade Unions, which represents employees across the country, to oppose the AB InBev-SABMiller merger. Because of AB InBev’s reputation for cutting costs and shedding jobs, it is gearing up to fight the deal.

That has sown doubts in some quarters about whether AB InBev–which reports full-year results on Thursday–will be able to secure South African regulatory approval and close the deal during the second half of the year, as planned.

The deal will test a unique aspect of South Africa’s regulatory process that requires weighing a deal’s impact on so-called “public interest,” namely employment in a country where about one in four people are unemployed. Sanford C. Bernstein & Co. analyst Trevor Stirling believes it could be AB InBev’s biggest hurdle, taking a minimum of 12 months and possibly 18 months or longer–making it slower than the regulatory process in the U.S., Europe and China.

South Africa’s public-interest clause has seriously hampered global mergers in the past, negating cost-cutting attempts and slowing deal approval. Wal-Mart Stores Inc.’s 2010 takeover of South African retailer Massmart, also opposed by trade unions, took roughly 18 months to close, about a year longer than hoped. It required a two-year moratorium on layoffs and funding for South African suppliers.

Gutsche Family Investments, Coca-Cola Co. and SABMiller agreed to combine soft-drink bottling operations in Nov. 2014, but South Africa’s competition commission didn’t recommend the deal for more than a year, and did so only under the condition the merging parties lay off no more than 250 people. Coke expects it to close in the second quarter, about 16 to 18 months after its announcement.

South Africa is important for AB InBev because it would give it a presence on a continent that is one of the world’s only growing beer markets. African volumes rose 2.6% last year while global volumes contracted 0.1%, according to Plato Logic.

It also is a critical piece of the regulatory-approval puzzle. AB InBev told bond buyers it would close the merger by mid-November. It is divesting assets in the U.S. and Europe to appease regulators and has begun talks in China over SABMiller’s stake in China Resources Snow Breweries, which brews the world’s biggest beer by volume.

India is the only one of nine key markets to approve the deal so far.

Getting approvals quickly is crucial not only for AB InBev but also companies planning to buy some of its assets: Molson Coors Brewing Co., which has a deal for the U.S. brewer MillerCoors LLC, and Asahi Group Holdings Group Ltd., which is negotiating for the Peroni and Grolsch brands.

AB InBev is trying to expedite the process in South Africa. It submitted paperwork in December to South Africa’s competition commission and said the deal wouldn’t result in layoffs, an AB InBev spokeswoman said. In January, it listed shares on the Johannesburg Stock Exchange, fulfilling a deal promise.

Chief Executive Carlos Brito also has visited South Africa twice this year and met with politicians, according to people familiar with his travels. The company also met with the Food and Allied Workers Union, an affiliate of the Congress of South African Trade Unions that represents many of SABMiller’s roughly 9,000 employees.

“We are committed to making a positive contribution to South Africa through our proposed combination with SABMiller, and…are engaging proactively and positively with stakeholders in South Africa,” an AB InBev spokeswoman said.

Still, the brewing giant is likely in for a fight. “This company was built on the back of the South African workers, and they can’t be discarded,” said Sizwe Pamla, spokesman for the Congress of South African Trade Unions. He said the union plans to employ a strategy similar to one used against Wal-Mart, mobilizing not just employees but also SABMiller suppliers.

Heather Irvine, an antitrust attorney at Norton Rose Fulbright South Africa who isn’t involved in the deal, said South African regulators generally believe “that shareholder value should not trump the interest of people and employment.”

South African investor Donald Rogan, who oversees Nedbank Private Wealth’s stockbroking business, said AB InBev’s stock listing in South Africa signals the government has “unofficially approved the deal.” He added the deal is expected to generate about $130 million in capital-gains taxes.

But securing approval will require AB InBev giving “comfort to the government about anything that would result in job losses,” Mr. Rogan said. “It has to be positioned as a good story.”

By Tripp Mickle

Source: MarketWatch

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