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Economy & Business

Analysts question viability of reported A-B takeover attempt

This article first appeared in the St. Louis Beacon: This Bud's for who?

Shares of Anheuser-Busch jumped Friday after a Financial Times blog said the Belgian beverage behemoth, InBev, was considering making an offer worth $46 billion for the St. Louis beer baron.

The early reaction on Wall Street is that Anheuser-Busch would want a higher price -- assuming it would make any deal. The Financial Times said InBev was considering making its sales pitch directly to August Busch IV, the chief executive of Anheuser-Busch.

If that were rebuffed, InBev would appeal to the board of directors and, if necessarily, directly to shareholders.

Some analysts questioned whether Anheuser-Busch management would relinquish the company's independence and whether attempts to merge corporate cultures would produce a problem-free marriage.

"While the limited commentary on the subject from management would suggest a strong desire to remain independent," the $65 a share offer is "not overly compelling," says Jonathan P. Feeney, of Wachovia Securities, in a research note to clients.

However, he quickly adds that the price is "probably fair." If the deal doesn't happen, Feeney figures Anheuser-Busch's stock price would only slip to the mid-$50s. He has a "market perform" rating, one of the many ways a Wall Street investment banker declares neutrality on a stock.

Anheuser-Busch said Friday that it doesn't comment on rumors about "potential investments, acquisitions, mergers, new business partnerships or other transactions."

On Friday, Anheuser-Busch closed at $56.61, up $4.03 for the day. The stock climbed as far as $58 a share, a 52-week high. Trading volume of nearly 54.7 million shares was more than 13 times the average daily trade for the last three months.

This isn't the first time that InBev has been mentioned as a suitor -- friendly or unfriendly -- for Anheuser-Busch. The Wall Street Journal reported in February that the two companies had talked. August Busch IV told the newspaper in early May that he wanted to protect Anheuser-Busch's independence.

Friday's rumored offer indicates that "InBev wants and needs this deal, but the timing is not perfect," says Carlos Laboy, of Credit Suisse, in a report to clients. "A hostile bid would have to go at a higher price." Credit Suisse has had an investment banking relationship with Anheuser-Busch in the last 12 months.

Laboy is neutral on the stock, as are most Wall Street analysts. According to the Thomson Reuters financial services firm, 10 analysts are neutral, four have buy recommendations and one advocates selling the stock.

He says Anheuser-Busch can make a hostile bid more unpleasant and expensive if the St. Louis company decides to buy the 50 percent of Mexico's Grupo Modelo that it doesn't own. Such a strategy could add $10 billion to $15 billion to a hostile-bid price by InBev, he says.

Laboy warns that there could be a serious culture clash if the companies merge. "For a proud and patriotic company like A-B, where the quality of life for employees is very high, we believe that selling out to a foreign entity that focuses so hard on cost control as a way to create value would be extraordinarily difficult," he says.

Laboy says Anheuser-Busch has made strategic decisions in the past that have been good for the business in the long term but didn't boost the stock price in the short term. "Selling to InBev might be good for the stock in the short term, but there is no guarantee it will be good for the business in the long term," he adds.

Laboy believes a merger could produce "enormous value creation," a financial consideration that will overcome shareholders' hesitancy and trump employees' concerns. "It would be possible to argue that a merger ... would be inviting a culture clash disaster of epic proportions," he says. "That may indeed be the case; in fact, we believe it is probably so."

Although Anheuser-Busch continues to dominate the U.S. beer arena -- first quarter's market share was 50.9 percent -- analysts have questioned how much more it can grow, especially as consumers' tastes change.

"The beer market is not what it once was," says an April report by the independent financial research firm Morningstar. Consumers are switching to so-called craft beers and premium wine and spirits "to the detriment of traditional brewers."

Morningstar noted that the company's operating profit last year was about 10 percent less than in 2003 and that operating-profit margins are lower vs. those recorded earlier in the decade.

Morningstar praised the company for responding to changing times, in part by making deals to sell imported and craft beers, including InBev brands such as Stella Artois and Beck's. That's the good news, says Morningstar. The bad news is that "commodity costs continue to rise to unprecedented levels," Morningstar says. "Competition from smaller and trendier brands remains a threat."

Robert W. Steyer, a freelance journalist living in New York, is a former business reporter for the St. Louis Post-Dispatch.

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