How To Lose $9 Billion: Be On The Wrong Side Of A Hedging Trade

Anheuser Busch Inbev SA (ADR) BUD's proposed $105 billion acquisition of rival SABMiller plc (ADR) SBMRY is expected to cost the company just short of $2 billion in advisory fees, expenses and taxes.

While this price tag may seem high, it pales in comparison to the $9 billion AB InBev lost so far on a currency hedge it arranged for the takeover of its British-based rival since the deal was valued at 79 billion pounds.

According to Bloomberg Gadfly's Chris Hughes, AB InBev set up a currency hedge in which it would pay $1.53 for each British pound required regardless of the current spot price between the two currencies.

As is well known, the British pound tumbled after the Brexit referendum in June and hasn't rebounded, currently sitting at around $1.33.

Hughes added that InBev said in a prospectus for the deal that the various derivative contracts it holds led to a $3.1 billion hit on the income statement and $5.9 billion hit on the balance sheet.

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So why is InBev in a better position having lost billions of dollars on a currency hedge? Simple: Had InBev not hedged the value of the deal and the British pound collapsed, SABMiller would have "had more ammunition to wring a better price."

SABMiller would have "reasonably" argued that the original price tag on the acquisition that was in British pounds undervalues its mostly non-pound profits and that InBev can now "easily" afford to pay more.

"For other bidders involved in cross-border deals, InBev's pain from its currency hedge won't be a deterrent to doing something similar," Hughes concluded. "And sometimes, constraints can be valuable."