Two deals part of the portfolio, Anthem/Cigna and AbInBev/SABMiller, have been making the headlines in recent weeks. Re-visiting those two opportunities and updating my views.
Two of the 5 pending deals in the portfolio date from before the the existence of this blog. Just seizing the opportunity of the recent press coverage to briefly go over them again as well as provide an update on my strategy.
ABInBev/SABMiller:Patience pays off, or at least somewhat
It was a long way to go – When I put some money in that deal back in October, I knew that I was up for a long ride because the tie-up between those two beer giants was going to take a while.
ABInBev’s stronghold is the Americas and Europe, but some of those markets are maturing so the company listed in Brussels is excited to join forces with SABMiller, which has a strong presence in high growth developing markets such as Africa.
The Megabrew, as some have dubbed it, makes enormous business sense; the research analysts have been dreaming of it for years. What was much more uncertain was how the transaction was going to be approved by the antitrust agencies around the world, especially in the US and China, where the combination would have given rise to unacceptable market domination.
To the credit of the parties involved, the deal seemed well prepared from the start. The companies have always communicated very clearly to the investors and the regulators how they were planning to address concerns and mitigate the risks.
Early on, divestures were put on the road map, and happened smoothly; when all was said, AbInBev had agreed to significant asset sales: Miller in the US, Peroni and Pilsner Urquell in Europe, and the Snow Breweries stake in China. While it must have been tough because all those are prized jewels, ABInBev did what it took to get the required approvals.
So with them doing all the right things, it would have been tough to swallow if the deal got derailed, as it could have, due to something external such as Brexit.
Due to the massive devaluation of the British Pound since the referendum result, some shareholders had started complaining about the cash offer of £44/share and the fact that it was a worse offer than the cash and share option, only available to certain large shareholders (US tobacco company Altria and the Santo Domingo family).
In response, AbInBev pre-preemptively raised its cash bid to £45/share and gave all shareholders an option to receive the consideration in both cash and share.
The cash and share option comes with some strings attached to it: the shares can’t be sold for 5 years and they will be allocated on a pro rata basis depending on the demand for them.
At the same time, the cash and share consideration values SABMiller at £51/share based on ABI’s current share price, 13% above the cash offer. I think that this treatment should alleviate the concerns of the activist investors that had started to agitate; SAB’s Board seems to agree and is reiterating its support of the new higher offer
Based on this sequence of events, there is a good chance that the proposal will go through at the shareholders’ vote (even with Altria and the Santo Domingo family voting as a separate class of shares). At least, I will definitely be voting in favor of it, and I think most people will do the same.
Given that ABInBev is a great company that I already hold in my non-merger-related personal portfolio, I am thinking of going with the cash and share offer since it represents more value for my SAB’s shares. In any case, the new combined company should be a formidable adversary in the beer industry, and the numbers 2 and 3, Heineken and Carlsberg, must be staying up late at night those days.
Anthem/Cigna: Throwing in the towel
When I ran the number on Anthem buying Cigna in one of two highly contested health insurer mergers (the other one being Humana/Aetna), also in October, the opportunity was much less clear cut than in the ABI/SAB deal.
For starters, the antitrust concerns were such that the spread on the deal was already 30+% at the time (it’s now slightly down, to 25%).
Even Hillary Clinton, the potential next President of the United States, had condemned the mergers and vowed to get them blocked. In an election year, that’s bad omens.
Why did I go ahead with this one, then, you’ll ask. The answer is: limited downside.
As I looked at it, the spread already reflected that the deal had a good chance of not happening and I was able to buy in at Cigna’s share price prior to the offer.
I figured that either i) the deal would end up going through and I’d make 30% or ii) the deal wouldn’t pass the competition authorities and Cigna would collect a US$1.85 billion reverse termination fee from Anthem, which I thought would benefit the business due to its sheer size. So I took my chance.
What has changed since? The DOJ has decided to sue Anthem over the proposed merger. While the DOJ doesn’t always win its cases, 55% of the deals it challenges do not get completed. Again, bad omens.
In light of the recent developments, I don’t see the risk reward relationship holding here anymore, and I’m closing my position (which was long Cigna and short Anthem since the consideration was cash and shares).
Since I had bought in at already depressed prices at the time, I am breaking even on Cigna and making a small profit on my Anthem shorts. If anything, it was a waste of time, and I’ll settle for that rather than a loss.
That’s it, you now know my thoughts on those 2 deals part of the portfolio. I have identified several other potential investments so stay tuned over the next few weeks to learn about those.
Disclosure: Long AbInBev, SABMiller.
This article expresses an opinion and the author does not receive compensation for it and has no business relationship with any company whose stock is mentioned in this article; do your own due diligence before making investment decisions.