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Economy & Business

A-B rejects InBev's offer

This article first appeared in the St. Louis Beacon: June 26, 2008 - Anheuser-Busch has rejected a $46.4 billion takeover bid from Belgium's InBev, saying the offer was "financially inadequate and not in the best interests" of shareholders.

The announcement, which came about an hour after markets closed on Thursday, turned down the $65-a-share cash offer even though Anheuser-Busch's stock has never reached that level.

Until rumors started in late May about an InBev offer, Anheuser-Busch's stock had never been higher than $55 a share on a split-adjusted basis. The stock closed at $61.35 Thursday.

"The board unanimously concluded your proposal is inadequate and not in the best interests of Anheuser-Busch shareholders," said August A. Busch IV, the chief executive, in a letter to InBev's CEO Carlos Brito.

"Your proposed price substantially undervalues Anheuser-Busch," he added. "We respect your desires to grow your company. But your growth should not come at the expense of our stockholders."

There was no immediate comment from InBev, whose public remarks about a friendly offer have exibited an increasingly insistent tone.

Analysts have warned that Anheuser-Busch would have trouble achieving better than $65 a share on its own. Prior to the official rejection, they wondered if Anheuser-Busch would play hard to get, trying to raise the price. InBev has said that $65 is a firm and final offer.

Busch criticized InBev's assertion that combining the companies could achieve "synergies" -- a combination of reducing costs and increasing market penetration, sales and profit.

"There is limited overlap in our respective businesses, Busch said. "Many of the suggested synergies seem not to be synergies at all, but are instead profit enhancements. We believe that we can deliver similar enhancements to our shareholders independent of a transaction."

Busch also argued that InBev's offer was a product of "opportunistic timing" due to the weak U.S. dollar and staggering U.S. stock market.

"From the standpoint of the Anheuser-Busch shareholder, however, a transaction with InBev at this time would mean foregoing the greater value obtainable from Anheuser-Busch's strategic growth plan," he added. "We are convinced that pursuing our program will enable Anheuser-Busch shareholders, rather than InBev shareholders, to realize the inherent value of Anheuser-Busch."

The company will unveil its strategic plan to analysts and investors Friday.


"InBev's proposal significantly undervalues the unique assets and prospects of Anheuser-Busch," said Patrick Stokes, chairman of Anheuser-Busch. "The proposed price does not reflect the strength of Anheuser-Busch's global, iconic brands Bud Light and Budweiser, the top two selling beer brands in the world."

Stokes said InBev's offer, which was made June 11, "undervalues the earnings growth actions" that Anheuser-Busch said that the company had already planned.

He criticized InBev's offer as failing to account for his company's "market position in the United States...and the high value of its existing strategic investments."

Anheuser-Busch has about 48.5 percent of the U.S. beer market. It also has a 50.2 percent ownership of Grupo Modelo, which controls about 56 percent of Mexico's beer market. However, Anheuser-Busch has no operational control over Grupo Modelo. The St. Louis company has several investments in Chinese beermakers, and it recently said it would buy out a small joint-venture partner in India.

However, analysts say Anheuser-Busch has been slow and late getting into foreign markets, allowing InBev and SABMiller to become world leaders.

Analysts have speculated that the company might sell some subsidiaries -- including its theme parks and its packaging businesses -- or declare a special dividend or buy back stock.

All of these efforts would be designed to convince shareholders that Anheuser-Busch can do better by itself than as part of InBev. But many analysts wonder if shareholders will settle for a promise of $65 a share in a few years vs. taking the money from InBev now.


A few hours before Anheuser-Busch said "No," InBev asked a Delaware court to rule if shareholders can throw out all of the St. Louis company's board members.

The is largely symbolic, but it also was a shot across the bow to the St. Louis company's directors telling them InBev was willing to bypass them if they didn't negotiate or agree to the "friendly" offer.

"InBev's strong preference is to enter into a constructive dialogue with Anheuser-Busch to achieve a friendly combination," the Belgian brewer said Thursday. But it added that it wants a court decision on "regarding alternative routes" to making a deal in which "Anheuser-Busch shareholders preserve their voice in the process."

InBev's suit was filed in Delaware Chancery Court because Anheuser-Busch is incorporated in Delaware. InBev wants to know if shareholders "acting by written consent may...remove without cause" all 13 board members.

Shareholders would have to file petitions with the Securities and Exchange Commission to remove Anheuser-Busch directors. They wouldn't have to wait until directors are up for election at the next annual meeting in April.

The suit is aimed at one defense against a hostile takeover -- the staggered election of board members. Many corporations hold such elections so that only a few can be replaced in a single year.

For example, a company could elect a group of directors for three-year terms in 2005, another group for three-year terms in 2006 and another group for three-year terms in 2007. This system discourages attempts by hostile suitors to elect a majority of directors.

Anheuser-Busch has eliminated this practice effective next year, and all directors will stand for election for one-year terms. However, five of the 13 directors are still serving under the old system.

"It is clear that the eight directors elected after 2006 are subject to removal through the written consent procedure," InBev said. InBev believes the other five can be bounced, too; but it wants an opinion from the special Delaware court that handles corporate governance matters.

Eight Anheuser-Busch board members were elected in April for one-year terms, including August A. Busch IV; his father, August A. Busch III, the former CEO and chairman; and Patrick Stokes. A ninth director was elected then; but Carlos Fernandez, CEO of the Mexican brewer Grupo Modelo, resigned from the board earlier this month.

Anheuser-Busch lacks the standard defenses that corporations can use against unwanted suitors. It doesn't have a two-tier-stock system in which certain holders (usually family members) own shares with greater voting power. Busch family members own an estimated 4 percent of shares.

It also doesn't have a so-called poison pill, although the board could resurrect one quickly without immediate shareholder approval. Poison pills allow existing shareholders to buy stock at steep discounts once an investor, deemed hostile by the board, acquires a certain percentage of shares. This strategy dilutes the invader's power.


InBev has essentially three choices -- fight, withdraw or "play the game."

Its Delaware court suit is a potential precursor to a fight, in which InBev also could make a direct stock-tender offer to Anheuser-Busch shareholders.

If it withdraws, InBev most likely will look for other targets or partners. There's been some Wall Street speculation that it might try to tie up with SABMiller. However, some analysts have said any talk involving SABMiller appears to be InBev-inspired press leaks designed to bluff Anheuser-Busch.

SABMiller has a bigger exposure to international markets than does Anheuser-Busch; and it has a bigger U.S. market presence than does InBev, whose U.S. impact is negligible.

The U.S. Justice Department recently approved creation of a joint venture for the U.S. operations of SABMiller and Molson Coors Brewing Co., establishing an estimated 30 percent of market share vs. Anheuser-Busch's 48.5 percent share. SABMiller won't be bidding for Anheuser-Busch.

On a smaller scale, InBev might make a run at Fomenta Economico Mexicano, also known as FEMSA, the second biggest brewer in Mexico with a 44 percent market share. InBev has no presence in Mexico even though it has significant market shares in several South American countries, especially Brazil and Argentina.

If InBev decides to "play the game," its board, after expressing regret about Anheuser-Busch's decision, will wait a few days or weeks and then come back with a sweetened offer. Observers can't rule out the possibility that Anheuser-Busch might find it easier to say "Yes" to, say, a $70 a share offer.

If Anheuser-Busch still says "No" under this scenario, some shareholders will probably sue, arguing that the company isn't acting in shareholders' best interests. There's also a good chance lawsuits will emanate from the rejection of InBev's offer.

Of course, if Anheuser-Busch had accepted the $65 a share, some lawsuits might have been filed, saying the company sold out too cheaply. Lawsuits will be the common theme in any actions taken by Anheuser-Busch or InBev.

If Anheuser-Busch thwarts InBev, it still must convince investors that it could achieve $65-a-share or better by itself.

Anheuser-Busch may be considered "in play" by activist hedge fund managers and corporate raiders, especially if its stock drops back into the $50s. These investors could buy shares so they can prod or threaten management into  improving shareholder value. If St. Louisans are worried about InBev, imagine what would happen if someone like Carl Icahn gets involved.

By fending off InBev, Anheuser-Busch will have to move quickly to convince investors that it has a strategic plan to raise the stock price quickly, but the company has limited choices.

It cannot make a major acquisition of any beer company with even a modest share of the U.S. market due to anti-trust considerations. And any potential foreign target knows A-B has a strong desire to make a deal, so the price will probably be high.

Selling off non-beer units, like the theme park division or the packaging division, will give Anheuser-Busch extra cash to make a purchase. But it better have an acquisition target lined up because sitting on a lot of cash makes Anheuser-Busch an even greater takeover target.

And what's the chance the theme-parks division will command top dollar when the economy teeters on recession and gasoline is $4 a gallon? Last year, the theme-parks unit and the packaging unit produced 18 perent of corporate sales and 10 percent of net profit.

Buying back stock is another tactic to raise the share price. If InBev goes away, Anheuser-Busch's stock will fall back at least into the low $50s; but buying back shares won't grow the business.

Anheuser-Busch also could try entering another beverage business via an acquisition, even though it has had a terrible track record of trial and error.

Other beer companies long ago learned how to make such moves. For example, the AmBev subsidiary of InBev is the largest PepsiCo bottler outside the U.S. SABMiller is a major bottler of Coca-Cola products outside the U.S.

So, the key questions for Anheuser-Busch remain: What's available? How much will it cost? Can it help drive sufficient sales and profit gains to overcome the the slow growth of the U.S. beer market?

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

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