September 01, 2016 | Consumer Discretionary | Europe | Ended

SABMiller / AB InBev: Proxy Adviser Risks

The only remaining and realistic risks to the SABMiller / AB InBev transaction are the upcoming voting recommendations by proxy advisers, namely Institutional Shareholder Services (ISS) and Glass Lewis (collectively, “PAs”). Investors who impulsively assume that PAs will side with the companies’ Boards and key shareholders are making a risky bet, as there are precedent ISS decisions and protocols that suggest ISS has legitimate reasons to recommend against the deal. There are concerns that institutional investors ‘blindly follow’ PAs’ voting recommendations and multiple studies have shown that ISS alone can influence 6-40% of a mid- to large-cap company’s share capital. SABMiller vote risks include the lower voting quorum due to the decision to hold a split vote, dissident shareholders and risk arbitrage funds holding positions in derivatives, thus unable to vote. Adding an ISS recommendation to vote against the deal will potentially put the vote outcome and deal in jeopardy.

Contents 1. Proxy Advisers and Their Influence on M&A Deals 2. ISS Considerations Suggesting a Recommendation to Vote ‘FOR’, because ISS: 2.1 Tends to side with management and is influenced by shareholder clients 2.2 Is ensured of no conflicts of interest, thus safeguarding minority shareholders 2.3 Compares multiples offered and takeover premiums versus precedent deals 2.4 Has recommended deals with light yet ‘reasonable premiums’ 2.5 Sides with ‘final’ offers, is aware of buyer limitations and repercussions of a failed deal 2.6 Is cognizant of any strategic alternatives and a ‘Bird in Hand’ 2.7 Rarely opposes deals with little shareholder opposition and a positive arb spread 2.8 May calculate that the revised offer is still reasonable and sufficiently compelling 3. ISS Considerations Suggesting a Recommendation to Vote ‘AGAINST’, because ISS: 3.1 Is in the midst of proving its independence in light of proposed US legislation 3.2 Bases its recommendations on what would be of interest to long-term shareholders 3.3 Has not been afraid to recommend against shareholders and against a 'final' offer 3.4 Has not been afraid to recommend against an already improved offer 3.5 Can recommend against an offer even if there is steep downside on a break 3.6 Considers the current state of play and ongoing ‘material beneficial changes’ 3.7 May recognise recent FX moves and assert that short-term downside is minimal 3.8 May conclude that, with an insufficient premium, the offer is not sufficiently compelling 4. Update: Timing, Probability of Completion and the Risk Arbitrage Spread (21 pages)

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