TOP STORY: Waiting for the Bud times

InBev is keen to extend its period of growth with the purchase of Anheuser-Busch, but the American giant won’t play ball. Ron Emler questions the merits of the deal and considers potential counter-bidders

One of this year’s worst kept secrets has been confirmed; InBev wants to buy Anheuser-Busch. It  has offered $46.3 billion (£23.5bn) for America’s biggest brewer in the latest stage of global consolidation, which earlier this year saw Carlsberg and Heineken take over Scottish & Newcastle.

Such a deal had been mooted for many months and the offer of $65 per share is almost 30% above Anheuser-Busch’s average price over the past 12 months; indeed, its shares had moved up recently only because whispers about an InBev bid became almost deafening. Including debt, the offer puts a total value of $56bn on the American group. InBev itself is valued by the market at just under $50bn.

By any standards, the sums involved are big bucks and it is significant that InBev has raised the finance at a time when credit is very hard to come by. That alone points to the deal appealing to the backers. Equally notable is the fact that despite the St Louis, Missouri-based giant repeatedly saying that it was opposed to any form of takeover, it did not reject the InBev offer out of hand.

The founding Busch family controls just 4% of the shares and while August Busch IV, the chief executive, had previously said that the business founded by his great-great-grandfather “will not be taken over on my watch”, the company has pledged that it will take its time and “pursue the course of action that is in the best interests of Anheuser-Busch’s stockholders”, who include Warren Buffett, the world’s richest man. Analysts interpret that as meaning that InBev may have to increase its offer to about $70 per share to secure victory. However, InBev has said its first offer is final.  

While the world’s brewers have been consolidating globally, Anheuser-Busch has mainly sat on the sidelines and reinforced its hold on the US market where its Budweiser and Michelob brands dominate. The group accounts for almost half of all beer sales in the US, which provides it with more than 90% of its revenues.

For its part, InBev has been growing at almost breakneck pace. Formed by the merger of Belgium’s Interbrew and Brazil’s AmBev in 2004, the Belgium-based company operates in 130 countries and has more than 200 brands. They include Stella Artois, Beck’s, Leffe, Brahma, Staropramen, Bass, Skol and Hoegaarden. But InBev has only a minimal presence in the US (where its brands are distributed by Anheuser-Busch) and so its bid is unlikely to face significant regulatory problems.

A successful takeover would make InBev the world’s biggest brewer with about 25.4% of the global market. It has said it will make Budweiser its flagship brand, but that has not appeased US sentiment, which sees the bid as a raid on a US icon at a time when the dollar is weak.

A good deal?
While a deal seemingly has strong logic, some analysts question its merits. The US market is mature and Anheuser-Busch’s sales have grown by just 1% annually for the past five years. They suggest that InBev’s growth has been based on continual cost cutting after a series of takeovers and therefore it needs another deal (and the associated savings) to keep the momentum going. Its record on brand building is patchy.

The critics also point out that the cost savings achieved by InBev have come during a buoyant period for the world economy. That has changed, they say, notably in Britain, where sales are at a standstill, and the US. That said, InBev reckons it can raise $8.3bn by selling off Anheuser-Busch’s peripheral interests, including its Florida theme parks.

The critics also suggest that a merger with the US brewer may not be that easy to achieve. Earlier this year SABMiller (created by a merger between South African Breweries and Miller) amalgamated its US business with Molson Coors (itself a US/Canada union). None of those consolidations went as smoothly as first hoped. Equally, many of the difficulties they faced were due to the very size of Anheuser-Busch and its dominance of the US market.

Anheuser-Busch, however, does have an international dimension that is appealing to InBev; it owns 27% of Tsingtao, China’s second biggest brewer. Coupled with its own Chinese interests, that would give InBev about a quarter of the market and the scale of operation needed to eclipse CR Snow, the current market leader.

China’s beer market is growing by about 10% a year and, as local demand increasingly switches to Western brands, Budweiser is already the leader in the “super premium” segment, one in which InBev is not represented.

Despite its rapid growth, however, the Chinese market offers low profitability of about 1.5 cents a litre; the comparable US figure is about 10 cents. The American giant also owns half of Mexico’s Grupo Modelo, which produces Corona, and has just over 3% of the world beer market.

That may be a headache for InBev because it has been mooted that Anheuser-Busch could bolster its own defences by bidding for full control of the Mexican group. InBev has issued a warning to the Anheuser-Busch board that such a move could spark litigation from shareholders who would be denied the full value of the InBev bid.

Discounting the possibility of a bid for Grupo Modelo from Anheuser-Busch, InBev would have to decide what to do with the 50% stake in the Mexican brewer – it likes full control, not partnerships. On the one hand, it would prefer Grupo Modelo in its own stable rather than a rival’s, especially because of growing Latino demand in the US: on the other, the Mexican company would demand a very full premium for the outstanding 50% of its equity.

Outside contenders
Could there be a counter-bidder for Anheuser-Busch? Undoubtedly SABMiller would face competition problems in Washington because such a deal would give it about 65% of the US market. More likely, say analysts, is a merger between SABMiller and Molson Coors to challenge the US dominance of Anheuser-Busch.

Some bankers have suggested either Heineken or Diageo as possible rivals for Anheuser-Busch. Such a move would represent a quantum leap for either company; anyhow, Heineken is in the throes of digesting its half of Scottish & Newcastle.

Diageo owns one of the world’s great beer brands – Guinness – and has about 12% of the beer market in Africa. Its global business is based on owning and developing premium brands, so Budweiser would be attractive – in principle at least. But would Diageo want to become involved in attempting to revive the stagnant US beer market and to take on debt equivalent to its own market capitalisation to do so?

There is a further question. Would any of InBev’s rivals want to take it on when grabbing another major global brand might be a possibility? Foster’s is reviewing its wine interests and there are suggestions that it might dispose of the troublesome division. That would leave its profitable brewing arm as a stand-alone entity… and make it a desirable target for someone with deep pockets at a time when InBev was otherwise occupied.

db © July 2008