Mergers and Acquisitions

Did you know that soon 1 out of every 3 beers will be sold by the same company? AB InBev is on the verge of completing the acquisition of SABMiller and this new company will be the biggest brewer by far (see all the brands above).  Once the deal is finalised in October 2016, it will effectively leave the world with only 5 major brewers.  If you want to see all five, click here.

How do deals like this get concluded?  What is the logic behind them?  These are the type of questions that I want to explore.

Merger and acquisition (M&A) activity should form part of your studies in you want to be a CA(SA).  To illustrate its importance, SAICA recently included a 100 mark question in the January 2016 ITC paper that was based on an M&A scenario.  Judging by the names (OmM and Pub) and the industry (advertising), it was clearly inspired by the failed merger between Omnicom and Publicis.  M&A is not only an interesting area of business, it is also clearly relevant for those wanting to qualify as CA(SA)s.

Do you want to know more about M&A’s?  My advice is to try and develop a “big picture” first.  There are so many different elements to a successful M&A – just look at the course outline for the Stanford Executive Education M&A course:


M&A brings all the different disciplines together – Financial Reporting, Strategy, Valuation, Sources of Finance. Legal and Tax.  It is an area that can be overwhelming if the “big picture” is not kept in mind.  How best to get the “big picture”?  Read two outstanding books about M&As.

Barbarians at the Gate – RJR Nabisco was ripe for the picking over 25 years ago.  It consisted of two major businesses – the one sold cigarettes (hugely profitable and piling up cash) whilst the other sold food (like Oreo cookies).  Clearly these businesses didn’t really belong together and value could be added by separating them.  This book tells the story of how 3 different parties fought for control.  Lawyers, accountants, management and more get involved.  Superbly written and still relevant even after all of these years.

Cold Steel – Lakshmi Mittal and his son keep attending auctions around the world for steel mills.  Steel mills have fallen on hard times because the industry is highly competitive and prone to being negotiated down to low prices.  At these auctions they keep getting into a bidding war with Arcelor, another giant of the industry.  They quickly realise that it might be cheaper in the long run to try and buy them.  This book takes you along for the ride.  I loved every minute of action – this book will not just give you the “big picture” but will motivate you to want to Google everyone in the book.  I know that is compulsory reading for new Investment Bankers in some companies.

Once you have read these books, I recommend choosing a recent deal that interests you and learning everything you can about it.  A great place to start your search is the Deal Makers website – it produces the most up to date M&A news in South Africa.  Look at recent award winners for ideas on deals of interest (2015 winner – AB InBev) as well as people who you might want to research (2015 winner – John Gnodde, who incidentally plays an important role as a Goldman Sachs advisor in Cold Steel).

So taking the AB InBev acquisition of SABMiller, let’s go and review all the info we can on the deal.  We can start here on the AB InBev website where all the legal documents are contained – it took 11 scrolls of the mouse to get to the bottom of all the announcements.  Start at the bottom and you have a magnificent timeline of all the moves, counter-moves and more.  For analysis on the deal, look no further than one of my valuation heroes Aswath Damodaran who wrote about the deal here.  His concluding paragraph makes for interesting reading:

“The history of 3G Capital (AB Inbev’s controlling shareholders) as successful value creators predisposed me to give them the benefit of the doubt, when I started assessing the deal. After looking at the numbers, though, I don’t see the value in this deal that would justify the premium paid. It is possible, perhaps even likely, that there is some aspect of the deal, perhaps taxes or other benefits, that I am not grasping. If so, I would encourage you to use my template, change the numbers that you think need to be changed, make your own assessment and enter them in this shared Google spreadsheet. It is also possible that even the smartest investors in the world can sometimes let over confidence drive them to over react. Time will tell!”

A lot has happened since this post in 2015.  Elliot Capital have bought just over 1% of the shares in SABMiller and that is not great news for AB InBev.  Elliot Capital are perhaps most famous for buying Argentinian government debt, which the government refused to pay, and then spending 16 years suing them.  At one stage they even seized an Argentinian navy ship!  They recently got paid out and earned more than 10 times their investmentWhy are they interested in SABMiller?  They know that AB Inbev are desperate to get the deal done, having spent 9 months getting all the legal issues sorted, so now they will lead the SABMiller shareholders in demanding more of a premium.  AB InBev have responded by raising the offer after the CEO of SABMiller sent out a memo to all staff telling them to stop all contact with AB InBev staff.  I am 95% sure that the deal is going to happen but AB InBev will probably have to cough up some more.  It’s like an episode of Suits!

This reminded me of Woolworths getting into a tangle when they bought David Jones in Australia.  An Australian businessman, Solomon Lew, rapidly bought a 10% holding in David Jones after the news was announced.  He is no disinterested bystander though, he has for years been the holder of 11.8% of Country Road in Australia, a company where Woolies owns the other 88.2%.

Woolies then announced on SENS that they are going to be buying out the minorities in Country Road for AU$17 a share (when a few months ago the share was at AU$4) but, and this is where the plot thickens, this is conditional on the Daivd Jones deal being successful.  The Sydney Morning Herald says it best, Solomon Lew has his Country Road revenge.

If all of this M&A action interests you, I would also suggest following smaller JSE companies like Stellar Capital (who are joining forces with Torre), Brait (where John Gnodde is CEO – they recently bought Virgin Active gyms) and Ethos Capital.  Ethos Capital are particularly interesting as they are a Private Equity company that just listed on 5 August 2016 (which kind of means its not really a Private Equity company anymore!).  Ethos holds a variety of investments (including Twinsaver tissues) and their portfolio is worth viewing here.

Finally, there is Steinhoff, a company that has been on an M&A mission second to none.  In the wake of the financial crises, with interest rates at very low levels, Markus Jooste, Steinhoff CEO said:

“I must also say that we are at the moment living in a world with the lowest interest rates in decades, so I would actually say that I would frown on management that does not make use of debt to grow their businesses”

Since then, Steinhoff has bought Pep and is now entering the USA with the acquisition of Mattress Firm.  These guys from Stellenbosch are certainly worth watching if you want to learn lots about M&A.  Are there any other companies that you are keeping an eye on?

In closing, I encourage you to read the books, follow a deal that interests you and enjoy the world of M&A.

Paul Maughan

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