UK takeover rules frustrate Bud's pursuit of SABMiller

By Freya Berry

LONDON (Reuters) - When it comes to navigating Britain's strict new takeover rules, even a deal-making machine like Budweiser brewer Anheuser-Busch InBev can take a wrong turn.

Just hours after making public its $100 billion (£65.3 billion) proposal for SABMiller in what would be the biggest-ever UK company takeover, the Belgian firm was forced to issue an embarrassing clarification.

It had signalled greater shareholder support for its proposal than it really had, thus running afoul of UK regulators that tightly monitor such exchanges to help shield targets from drawn-out and distracting dramas.

Chief Executive Carlos Brito at first said he "expected" to have the support of the Colombian Santo Domingo dynasty, SAB's second-largest shareholder, but later watered it down to say only that he would "hope" to have it. UK rules state shareholders must prove their support in a letter of intent, which then must be made public.

The forced change in language exposed deep divisions among SAB's board and core shareholders, making the long-speculated combination seem, for the moment, like less of an inevitability.

As well as a test for AB InBev, which has done lots of deals but never in the UK, the SAB approach is another major test for the UK's new takeover guidelines, overhauled in 2010 following the protracted battle for British darling Cadbury by U.S. food giant Kraft.

Given that the first major test - Pfizer's approach for AstraZeneca - ended in a failed $118 billion (£77 billion) deal, billions of pounds in lost market value and hundreds of millions lost in fees, parties on both sides are now trying hard for a better outcome. "I think shareholders have learned their lesson from AstraZeneca," a London-based banker said. "AstraZeneca shareholders felt they delivered subtle messages that weren't necessarily picked up by the board, so they're learning to be less subtle." The UK's new guidelines include the "put up or shut up" rule, whereby a would-be acquirer has just 28 days from its bid interest going public to either make a firm offer, strike a deal or secure the target's agreement for a deadline extension. AB InBev has a deadline of 5 p.m. UK time on Oct. 14.

The rule makes life difficult for buyers, who cannot rely on long-term siege tactics, while targets can simply sit tight and watch the clock tick down. It also means shareholders in targets wanting a deal need to move quickly to push boards towards talks.

"It seems AB Inbev haven't quite realised how short 28 days is," said a source involved in the AstraZeneca/Pfizer attempt. "I'm somewhat surprised at how they've failed to make the most of it."

RACE AGAINST THE CLOCK

Altria Group, SAB's biggest shareholder, moved only 20 minutes after AB InBev's proposal went public, at 2:20 a.m. in the Marlboro maker's hometown of Richmond, Virginia. It urged SAB's board "to engage promptly and constructively" with the Belgium-listed company.

Of a swarm of London M&A bankers, lawyers and public relations advisors, many worked on both cases and say lessons can be learned. The AstraZeneca battle saw shareholders split between those in favour of independence and those frustrated the board did not engage more with its U.S. suitor.

"After the Pfizer situation, you've got to get out in front of shareholders ASAP. A week is the minimum," said an advisor who worked on both deals.

Brito ended up with just a week, after frustration at SAB's lack of "meaningful engagement" led him to go public early on Wednesday. He said he was "surprised" by the reaction of the Peroni and Grolsch brewer. He met with SAB investors in London on Thursday and New York on Friday this week.

A source close to the situation said AB InBev kept the talks quiet for as long as it did in the belief it could get a deal done privately.

SABMiller said on Wednesday that the proposal of 42.15 pounds a share "very substantially" undervalued the firm, and that with the cash-and-share alternative provided for core shareholders, the implied price was about 40.21 pounds a share, or 65 billion pounds ($99.55 billion).

SABMiller launched its own charm offensive on Friday with an accelerated cost-savings plan, and said that it was meeting with investors "to discuss its recent trading statement and to provide an update on its operations."

"You're looking at a chairman who has a bit of form in fending off bids," Richard Marwood, senior investment manager at AXA Investment Managers said, referring to SABMiller's Jan du Plessis, who successfully saw off Glencore's approach to miner Rio Tinto last year.

"Is this just a negotiating tactic or are they absolutely committed to staying independent?"

AB InBev has not ruled out the possibility of going hostile. Brito's appeals to shareholders to "voice their views" have already been labelled "hostile-lite" by one analyst.

It remains to be seen who, if anyone, blinks first. But even if no agreement or extension is granted by the Wednesday deadline, many believe a deal will be struck eventually.

"They are phenomenal businessmen," a person close to the SAB camp said of AB InBev. "For SAB, there are limited long-term defences in what is becoming a very consolidated space."

(Additional reporting by Martinne Geller, Ben Hirschler and Simon Jessop; editing by Susan Thomas)