As a lifelong St. Louisan, it is hard to objectively evaluate the proposed takeover of Anheuser Busch (ticker symbol: BUD) by Belgian brewer InBev (ticker symbol: INB BB). That said, as a fiduciary for our clients, we have a responsibility to put client interests above all else as we consider our options in the takeover with respect to the 25,000 shares that our clients own.
We have been asked by several clients what we should do. Right now, the answer is that we shouldn’t do anything except see how the deal plays out. There are really only two potential outcomes: the deal goes through, in which case our clients will get $65 dollars in cash for their shares held, or, the deal fails and BUD likely drops in price down to the pre-rumor levels between $45 and $50 per share.
The case for the merger is that the ‘transformational deal’ would create the largest brewer in the world with 300 brands across six continents (no word on who controls Antarctica), sales in excess of $36 billion and production of 10 billion gallons of beer per year. There has been a lot of consolidation already in the beer business and INB probably feels like this is their time to may hay since a substantial portion of their recent growth has been due to strong performance in emerging markets.
The case against the merger (beyond my personal antipathy towards losing a hometown favorite) is fairly strong as well. Given that there is relatively little geographic overlap between the two companies and the promises to keep the existing U.S. breweries, it’s hard to imagine that there are a lot of cost savings to be had, despite INB’s notorious penny pinching and ‘zero-based budgeting.’
As for whether the deal will get done, it may be fairly tempting for a lot of shareholders. The stock has languished over the past five years and the $65 buyout is nearly 20 percent higher than the all time high for BUD stock several years ago. It may be hard for management to argue that they can improve the company enough to justify a $65 price given that they haven’t done so in the years since the high while the market was generally rising.
That said, there is a lot going against the deal. First of all, you have a foreign buyer looking at an iconic American brand. This would be the third largest foreign purchaser deal in U.S. history, and while there is no national security risk like some of the other failed bids, it may be hard for shareholders to stomach a Belgian King of Beers. It’s possible that there could be anti-trust issues as well, since the combined company would be 50 percent larger than the current number one company, SAB Miller.
On the financial front, it won’t be easy for INB to get the deal done. For one thing, they aren’t substantially larger – the market capitalization for INB is approximately $47.5 billion compared to BUD’s $44.1 billion market capitalization. Furthermore, while INB has put together some preliminary debt financing, consummating the $40 billion in loans may still prove difficult in today’s credit environment.
BUD could also throw a wrench into the deal by purchasing the remaining 50 percent of the Mexican brewer, Grupo Modelo, which would raise the price tag beyond what INB could afford. And, although BUD let their poison pill lapse three years ago, they could reinstate it quickly if there is board support.
It’s well known that the Busch family opposes the deal, but they only own four percent of the outstanding stock, which probably isn’t enough weight to throw around. The hidden block of shares, though, is among the distributors. We don’t know how many shares they control and they want to keep the current regime in place since they are hugely profitable entities and large recipients of the marketing dollars. IBB would want to make cuts here, so it would probably take a price of $70 or above to get the distributors on board.
So far, Wall Street seems to like the deal. Usually when a merger is announced, the stock price for the buyer falls and the price for the target goes up. Today, INB’s price rose, although it could be a red herring since the price has fallen since the deal rumors emerged a few weeks ago. While BUD has risen, there is still a five percent premium between where it is trading today and the takeover price, suggesting a fair amount of uncertainty.
Given what we saw with the recent Microsoft/Yahoo imbroglio, this deal may be tough to swallow.
We have been asked by several clients what we should do. Right now, the answer is that we shouldn’t do anything except see how the deal plays out. There are really only two potential outcomes: the deal goes through, in which case our clients will get $65 dollars in cash for their shares held, or, the deal fails and BUD likely drops in price down to the pre-rumor levels between $45 and $50 per share.
The case for the merger is that the ‘transformational deal’ would create the largest brewer in the world with 300 brands across six continents (no word on who controls Antarctica), sales in excess of $36 billion and production of 10 billion gallons of beer per year. There has been a lot of consolidation already in the beer business and INB probably feels like this is their time to may hay since a substantial portion of their recent growth has been due to strong performance in emerging markets.
The case against the merger (beyond my personal antipathy towards losing a hometown favorite) is fairly strong as well. Given that there is relatively little geographic overlap between the two companies and the promises to keep the existing U.S. breweries, it’s hard to imagine that there are a lot of cost savings to be had, despite INB’s notorious penny pinching and ‘zero-based budgeting.’
As for whether the deal will get done, it may be fairly tempting for a lot of shareholders. The stock has languished over the past five years and the $65 buyout is nearly 20 percent higher than the all time high for BUD stock several years ago. It may be hard for management to argue that they can improve the company enough to justify a $65 price given that they haven’t done so in the years since the high while the market was generally rising.
That said, there is a lot going against the deal. First of all, you have a foreign buyer looking at an iconic American brand. This would be the third largest foreign purchaser deal in U.S. history, and while there is no national security risk like some of the other failed bids, it may be hard for shareholders to stomach a Belgian King of Beers. It’s possible that there could be anti-trust issues as well, since the combined company would be 50 percent larger than the current number one company, SAB Miller.
On the financial front, it won’t be easy for INB to get the deal done. For one thing, they aren’t substantially larger – the market capitalization for INB is approximately $47.5 billion compared to BUD’s $44.1 billion market capitalization. Furthermore, while INB has put together some preliminary debt financing, consummating the $40 billion in loans may still prove difficult in today’s credit environment.
BUD could also throw a wrench into the deal by purchasing the remaining 50 percent of the Mexican brewer, Grupo Modelo, which would raise the price tag beyond what INB could afford. And, although BUD let their poison pill lapse three years ago, they could reinstate it quickly if there is board support.
It’s well known that the Busch family opposes the deal, but they only own four percent of the outstanding stock, which probably isn’t enough weight to throw around. The hidden block of shares, though, is among the distributors. We don’t know how many shares they control and they want to keep the current regime in place since they are hugely profitable entities and large recipients of the marketing dollars. IBB would want to make cuts here, so it would probably take a price of $70 or above to get the distributors on board.
So far, Wall Street seems to like the deal. Usually when a merger is announced, the stock price for the buyer falls and the price for the target goes up. Today, INB’s price rose, although it could be a red herring since the price has fallen since the deal rumors emerged a few weeks ago. While BUD has risen, there is still a five percent premium between where it is trading today and the takeover price, suggesting a fair amount of uncertainty.
Given what we saw with the recent Microsoft/Yahoo imbroglio, this deal may be tough to swallow.
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