Will Altria Use This Buffett Trick With SABMiller?

Image: SABMiller.

Many investors probably assumed that a deal from beer maker Anheuser-Busch InBev to acquire rival SABMiller wouldn't have any impact whatsoever on the tobacco industry. Yet unbeknownst to many, cigarette giant Altria Group is also a big player in the beer industry, thanks to its roughly 27% stake in SABMiller, and so the possibility of an Anheuser-Busch buyout of SABMiller has huge implications for Altria's primary source of diversification beyond tobacco. With many analysts looking at possibilities for Altria to hang onto its foothold in brewing and avoid having to pay billions of dollars in capital gains taxes, one tax-smart strategy that few have looked at is the one that Warren Buffett has made popular recently in similar situations involving holdings on which he has booked a considerable profit over time.

Where the deal stands

Initially, some feared that Altria might end up with nothing but cash as a result of a potential bid for SABMiller, and that raised a number of concerns. The most obvious worry is that losing SABMiller would cost Altria its primary business exposure outside the tobacco realm, with its Ste. Michelle wine unit representing a much smaller business than the beer maker. Yet in addition, Altria has also seen the value of SABMiller skyrocket since it acquired its position, and so any cash-out deal would have major tax implications.

In the weeks since Anheuser-Busch announced that it was considering a deal, however, it has become clear that Altria is playing a major role in the thinking between the two beer companies. As a result, many now believe that the eventual deal -- which Anheuser-Busch must make formally by Oct. 14 in order to comply with U.K. takeover rules -- will include a substantial number of Anheuser-Busch shares.

That's fine for Altria, as stock-based tax-free reorganizations like this occur all the time. Altria would be able to transfer its cost basis in its SABMiller stake to its new holding in Anheuser-Busch shares, further deferring capital gains taxes until whenever it might decide to sell off the Anheuser-Busch stock in the future. The challenge, though, is that the current major shareholders in Anheuser-Busch don't want to issue too much new stock, as it would dilute their ownership of the company.

The Buffett strategy

So far, most analysis has focused on the idea that Altria would want a stake in all of Anheuser-Busch going forward. Yet an alternative to that scenario could also achieve the tax savings that Altria wants without the need for Anheuser-Busch to issue new shares.

On several occasions now, Buffett has used appreciated shares of companies in which he has a major position as payment for something he wanted. With Procter & Gamble , he traded a $4.7 billion position to acquire P&G's Duracell division, avoiding about $1 billion in capital gains taxes. Earlier deals involved trading Phillips 66 stock for a business specializing in improving pipeline flows, and trading part of his stake in former Washington Post publisher Graham Holdings for a television station.

If Altria were to pursue such a strategy, it's not entirely clear what part of Anheuser-Busch it would want to focus on. The beer giant's corporate structure is already highly convoluted, with a host of production and distribution companies that are geared toward the company's large number of different brands and geographical areas.

Given Altria's domestic focus in the cigarette industry, though, it seems natural for Altria to want exposure primarily to Anheuser-Busch's U.S. beer operations. Combining Marlboro and Budweiser under one roof would be a huge win for Altria, and while an outright carve-out of U.S. operations will never happen, giving Altria a disproportionately larger stake in what happens domestically could fit well with the tobacco company's overall marketing mission.

With just a short period of time left to finalize an offer, hammering out a Buffett-style deal with Altria could be extremely difficult for Anheuser-Busch to navigate. Nevertheless, if Altria were interested in any particular piece of the Anheuser-Busch empire, using the strategy could make it easier for an eventual SABMiller acquisition to happen.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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