Prepared Foods August 23, 2004 enewsletter

Brazil's stock market regulator has ruled that Interbrew SA's takeover of Brazil's biggest brewer does not harm certain minority shareholders, allowing the €10.3 billion ($12.7 billion) deal to pass in a shareholders vote this month.

Interbrew's deal, announced in March, to buy Cia. de Bebidas das Américas (AmBev) and become the world's largest brewer by volume was contested by Brazil's largest pension fund, Previ, which owns 14.7% of AmBev's preferred shares.

Previ lodged a complaint with the regulator in February, arguing that part of the deal -- Interbrew's planned sale of Canadian subsidiary Labatt Brewing Co. Ltd. to AmBev for €5.8 billion ($7.0 billion) in exchange for 23.3 billion new common and preferred AmBev shares -- valued Labatt too highly.

As a result, the value of preferred shareholders' listed shares plummeted 30% one month after the deal was announced. Still, securities market regulator CVM ruled that nothing about the deal, including the Labatt share-swap price, "would characterize it as detrimental to AmBev minority shareholders or justify an administrative inquiry."

Its argument is supported by a corporate law that guarantees common minority shareholders 80% of the price per share paid for the controlling stake but does not give preferred shareholders any tag-along rights. As a result, the Interbrew deal gave common minority shareholders a 60% premium and preferred minority shareholders no premium at all. In Brazil, preferred shareholders are compensated in other ways, such as with higher liquidity and better dividend rights than common shareholders.

A Previ spokesman said, "The CVM decision wasn't surprising given that the corporate law, when strictly defined, doesn't give preferred shareholders tag-along rights. But neither the law, nor the CVM's interpretation of it, takes into account the degree to which deals, by the way they're structured, can hurt those shareholders."

Pedro Gaudi, an analyst at ABN Amro Real, said "the corporate law handcuffed" the CVM. "The CVM can also argue that AmBev's preferred shareholders knew the risks they were taking when they bought their shares and decided to swap those risks for greater share liquidity."

AmBev decline to comment.

The deal is expected to close August 27 when AmBev controlling shareholders meet to approve it.