SAB Sabmiller

By Saabira Chaudhuri and Ian Walker 

Anheuser-Busch InBev NV on Friday reported a huge drop in second-quarter net profit, as it reeled from a $1.77 billion hit tied to foreign-exchange hedging toward its $100 billion-plus beer megamerger with SABMiller PLC.

Also on Friday, SABMiller's board recommended that shareholders approve AB InBev's increased offer of GBP45 a share, bringing an end to several turbulent weeks that jeopardized a more than $100 billion combination of the world's largest brewers. The board's decision followed approval by Chinese regulators, the final government clearance needed.

AB InBev said it made a net profit of $152 million for the quarter ended June 30, down from $1.93 billion a year earlier. Results were dragged down by one-time finance costs after AB InBev hedged GBP46 billion ($61 billion) toward the SABMiller transaction at an average rate of $1.53 per pound. Following Britain's vote to leave the European Union, the currency's value dropped to $1.33 per pound on June 30 when AB InBev's second quarter ended.

On a so-called normalized basis, which strips out one-time items, profit fell 13% to $1.73 billion.

Investors nevertheless cheered the results, with AB InBev shares up 2.3% to EUR112.75 ($125.01) in morning Brussels trading.

The Belgian-based beer giant lowered its revenue guidance for Brazil, now saying it expects flat revenue in fiscal 2016, down from a prior view for growth of mid- to high-single-digit percentage growth. The company blamed a weak consumer environment and the increased mix of returnable glass bottles, which widen profit margins but lower sales per hectoliter.

Overall, AB InBev's revenue fell 2.2% to $10.81 billion in the second quarter as total beer volumes fell 1.7% and the company was hit by currency volatility. On an organic basis, which strips out currency fluctuations, revenue climbed 4% as AB InBev pushed through higher-price products.

The results come after AB InBev on Tuesday raised its cash offer for SABMiller by GBP1 a share to GBP45 and sweetened its cash-and-share offer by 88 pence. The move aimed to quell brewing shareholder dissent about the takeover, which has come under pressure following the pound's decline after Britain voted to leave the EU.

AB InBev on Friday said it continues to work to close the deal this year. Acquiring SABMiller would give it access to the fast-growing African beer market and reduce its reliance on the U.S., where it has struggled to get people to drink Budweiser and Bud Light.

Exane BNP Paribas analyst Eamonn Ferry said the quarter was "poor," marking a weak performance for four out of the past five quarters. "Perhaps AB InBev have no massive incentive to knock the ball out of the park right now," he said, noting the current tension with regard to its share price over the SABMiller deal.

SABMiller shareholders have complained in recent weeks that the pound's devaluation has eroded the premium that the cash-only offer, designed for the majority of shareholders, had before Brexit over the cash-and-stock offer. The latter comes with a five-year lockup period and was designed for AB InBev's two largest shareholders to give them certain tax and accounting benefits.

In the U.S., AB InBev reported organic revenue growth of 2.3%, helped by brands such as Michelob Ultra, whose volumes climbed more than 20%. Revenue grew 9.5% organically in Mexico, 2% in Brazil and 3.9% in China. In Brazil beer volumes fell 4.5%

"Brazil is a very tough consumer environment -- inflation is high, unemployment is high, so customers' available incomes are under pressure, " Chief Executive Carlos Brito said on a call with reporters. While the second-quarter results were an improvement from the declines AB InBev saw in Brazil in the prior quarter, Mr. Brito said this wasn't at the speed he expected.

AB InBev is eyeing the coming Olympics to push its beer in Brazil, with plans to focus marketing on its Skol Ultra brand, a low-carbohydrate, low-calorie beer. "It's an active lifestyle beverage, and we intend to connect that with the Olympic Games opportunity," he said. "Of course, the Olympics is not like the World Cup, but we want to make the Olympics a beer occasion as well."

AB InBev will run consumer promotions in Brazil and plans to invite key trade customers to a VIP tent in the Olympic Park.

Mr. Brito declined to take reporters' questions about the pending merger with SABMiller.

Tripp Mickle contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Ian Walker at ian.walker@wsj.com

(END) Dow Jones Newswires

July 29, 2016 13:19 ET (17:19 GMT)

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