This week the Inbev offer for SABMiller shareholders closes.

While SABMiller trades at 45 pounds, i.e. the cash offer consideration, there’s also a partial share offer option that has become more interesting after Brexit currency volatility. By electing the partial share offer, one gets future Brussels listed Inbev shares with a five year lockup, and a small sum of cash upfront. Have a look at this great company presentation for background.

I imagine that the lockup clause is to discourage as many non-family holders of SABMiller as possible of taking this sweeter option and pay less for a successful merger. AB Inbev management is notorious for being frugal. If you are a real long term investor, this is true time arbitrage to take advantage of.

I made a Google Excel sheet with live updated prices to analyze the economics of this offer.

What I found is a pre-tax IRR (as of Oct. 4th) of 2.8% p.a. above the return one gets by just holding AB Inbev (ABI in Brussels) in the same period.

This positive carry is created by

1) paying only 80c on the dollar for ABI restricted stock,

2)  getting the extra dividend on this incremental 20c of ABI stock.

A 25% dividend tax subtracts less than 10 basis points p.a.

I am still hesitant to participate. On the one hand I am a big fan of these large positive carries. On the other hand I have doubts about the valuation of public mega-cap companies today. This brings me to very interesting letters of the hedge fund Horizon Kinetics about the unsustainable index ETF boom (see here here and here)

Because my portfolio is not levered at all (I am about 90% invested, and 10% in cash), there is room to participate and hedge my exposure by shorting AB Inbev as the short borrowing cost is zero. As my restricted stock is unlisted, this can only be done at a small percentage of my portfolio to avoid margin call mayhem in case Inbev stock rallies heavily.

If I participate and hedge my exposure, it will most probably be at a percentage of NAV < 5%.

Best,

TC