Analysis: Winners and losers in the big beer deal
This article first appeared in the St. Louis Beacon: July 14, 2008 - Now that Anheuser-Busch and InBev say they are friends, let’s look at potential winners and losers - both short-term and long-term - based on the Belgian brewer’s new offer for Anheuser-Busch at $70-a-share in cash.
One note of caution for investors and local residents: Just because the companies’ boards have given the OK, that doesn’t mean the deal will be completed. There are still several months in which something could sink the agreement.
St. Louisans may recall the “merger of equals” between the old Monsanto and American Home Products. The proposed marriage was called off in 1998 because each chairman thought he was more equal than the other chairman.
Even when a deal proceeds smoothly, there’s no guarantee it will be successful. Ask former A.G. Edwards shareholders what happened to their investments after the St. Louis brokerage was acquired by Wachovia Corp. On second thought, don’t ask.
So, as Anheuser-Busch shareholders contemplate their vote, here’s an early look at how the deal will directly, and indirectly, affect participants in the global beer business.
Anyone who, ideally, wanted an independent company will decide this is an offer they can’t refuse, especially because they don’t know when, or if, Anheuser-Busch could have achieved such a stock price by itself. Many analysts doubted it could hit $65 a share. The offer is an easy choice for anyone who doesn’t care what InBev might do to the Clydesdales or whether St. Louis loses another corporate headquarters. Institutional shareholders and hedge-fund managers inhabit this category.
These investors want the most money and the fastest paycheck. The original InBev and the sweetened offer are better than the low $50s where Anheuser-Busch’s stock had drifted for five years until takeover rumors started in late May.
Some investors might decide to cash out now, leaving a few dollars on the table but guarding against the deal blowing up. The stock could drop into the $50s if the deal collapses.
“We think Anheuser-Busch’s shares are trading more based on InBev’s offer price than on fundamentals,” says Jack Russo, of Edward Jones, in a July 11 research report before the agreement was made.
The Belgian beermaster gets what it wanted - control of about half of the U.S. beer market and a chance to expand the Budweiser brand worldwide. But remember the old saying: Be careful what you wish for; you might get it.
The higher price could stretch inBev’s financing arrangements and put pressure on its credit rating. InBev said Monday it has the extra financing and expects to maintain a strong credit rating.
InBev may have to cut costs faster and more extensively than it had publicly forecast. It must make sure to retain key Anheuser-Busch employees, especially those steeped in the distribution and marketing traditions that distinguish the U.S. beer market from global markets.
Maintaining good employee relations, especially with the Teamsters union whose contract expires in February 2009, will be crucial. The union represents more than 7,000 Anheuser-Busch employees.
In the near-term, the InBev takeover is good news for the new joint venture in the U.S. between Molson Coors and SABMiller, says Carlos Laboy, a beverage analyst for Credit Suisse, in a Monday research report.
“Only a month ago, A-B was touting the disruptions that the Miller and Coors networks were about to go through,” he writes “Those seem pale in comparison to the disruptions A-B is now facing.”
The joint venture puts the Coors and Miller brands under one roof, creating a 30-percent U.S. market share vs. the Anheuser-Busch share of 48.5 percent. The joint venture appears to have started smoothly, he says.
Lawyers & Investment Bankers:
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Although InBev is buying the St. Louis company’s stock, it is inheriting the debt. When InBev made its initial offer, the major bond-rating firms - Fitch, Standard & Poor’s and Moody’s Investor Services - all warned that such a deal could impair Anheuser-Busch’s credit rating, thus raising the cost of borrowing.
At $65 a share offer, InBev said it would have to borrow at least $40 billion. At $70 a share, Inbev must borrow $45 billion.
Although InBev CEO Carlos Brito has said he wants to retain an investment-grade rating, “it will be a tough sell to the rating agencies,” says Craig Hutson, a senior bond analyst at Gimme Credit, an independent research firm on corporate bonds.
In a Monday research note, he said the takeover is “clearly negative” for $6.9 billion in Anheuser-Busch bonds that will be inherited by the new company. “Credit measures have weakened.”
InBev bondholders will feel pressure, too. How long the pressure lasts depends on how fast InBev can reduce its debt. InBev said Monday that strong cash generation of the merged company will lead to a “rapid de-leveraging of the balance sheet.”
Seeking to protect Anheuser-Busch, their political instincts were a no-brainer. However, that’s also the best way to describe their economic instincts.
Sen. Claire McCaskill, D-Mo., vowed to try to block the deal after meeting with InBev CEO Carlos Brito on June 17. “Asked what specifically she could do to stop the sale, McCaskill said she wasn't sure yet,” said an Associated Press account of her meeting.
The InBev bid “is troubling to me because it potentially raises antitrust issues ... by putting a significant market share of the U.S. in the hands of fewer competitors,” said Sen. Christopher Bond, R-Mo., in a June 12 letter to the U.S. Justice Department and Federal Trade Commission.
A few weeks later, U.S. regulators approved the Molson Coors-SABMiller joint venture in the U.S., creating one operating unit with a 30 percent market share. Unless McCaskill and Bond convince Congress that the deal is a risk to national security, there’s little chance to block it.
Gov. Matt Blunt warned of foreign influence and diminished competition as he asked the Federal Trade Commission to review the bid. If InBev succeeds, it would “result in more than half of the beer sold in the United States being controlled by a single company,” he said on June 16.
That’s nearly what occurs today. Anheuser-Busch has a 48.5 percent market share. InBev has only a handful of percentage points of U.S.market share.
Gov. Blunt asked the Department of Economic Development “to explore every option and any opportunity we may have at the state level to help keep Anheuser-Busch in St. Louis.”
If Blunt succeeds, Missouri would be on par with France. Amid rumors that U.S. food companies were ogling yogurt-maker Group Danone, the French government enacted a tough law three years ago to discourage hostile takeovers from foreign companies.
The St. Louis company said it would offer buyouts to 10 percent to 15 percent of 8,600 salaried workers as part of a stay-independent plan revealed in late June. So, that sets a floor on how many people will lose their jobs.
InBev CEO Carlos Brito has promised to keep all 12 Anheuser-Busch breweries in operation; forecast little or no impact on union jobs; and predicted no “significant” job losses after the takeover. Needless to say, workers are nervous.
“There is no joy in Budville,” says Juli Niemann, executive vice president of Smith, Moore & Co., a Clayton financial advisory firm.
Having visited Pestalozzi Street on Monday morning, Niemann says she heard “Bronx cheers” from people in the neighborhood. “Cost cutting will commence immediately - if not sooner - with the merger,” she says.
The Teamsters Union recently asked to meet Brito to discuss matters “to protect our members’ interests,” the union said.
“The dynamic nature and inherent volatility of both mergers and acquisitions transactions and the capital markets themselves can lead to rapid and substantial changes in strategy,” the union said.
By the way, are any former TWA employees around who can remember the promises Carl Icahn made when he was battling Frank Lorenzo for control of the airline?
When Anheuser-Busch announced its independence plan last month, it said it would keep non-beer assets like the theme-parks and packaging subsidiaries. Considering the U.S. economy, it said, selling those assets made no financial sense.
These units have done well, but they are still small parts of the big picture. Last year, they accounted for 18 percent of corporate revenue and 10 percent of net profit. For 2008, Anheuser-Busch predicts the theme-parks’ profit will grow in the "high single digits" this year, but the packaging profit will drop by "low double digits."
InBev would have to balance its debt-retirement desires with a concern about selling assets at bargain-basement prices. On Monday, the takeover agreement said unnamed “non-core assets” from both companies would be sold. On Monday, Brito said $7 billion in unnamed “non-core assets” from both companies could be sold.
Depending on how fast InBev cuts costs, pays off debt and expands revenue, shareholders could experience short-term pressure. It’s hard to predict how “short” the short-term will be.
The pressure began before the rumors of InBev’s interest emerged in late May. Between mid-April and July 11, the stock was off 26 percent.
Stocks of acquiring companies often drop after a takeover announcement is made. On Monday, InBev lost 3.4 percent on the Brussels exchange.
Mexican Beer Companies:
A successful InBev bid could rattle this market where Grupo Modelo is the leader and Fomento Economico Mexicano (FEMSA) is a strong second.
Anheuser-Busch owns 50.2 percent of Grupo Modelo, but it lacks operational control. Grupo Modelo has given Anheuser-Busch’s bottom line a big boost. There had been rumors that Anheuser-Busch would try to buy out its partner, thus making it more expensive for InBev to acquire the St. Louis company.
On Monday, Grupo Modelo announced that it must have a say in the InBev takeover of Anheuser-Busch. InBev said it was talking cordially to the Mexican brewer.
Credit Suisse analyst Laboy wondered Monday if Grupo Modelo “missed a once-in-a-lifetime chance to be paid a premium for reappraising the A-B stake held in Modelo.” He doesn’t know if Grupo Modelo is playing a waiting game to get more money from InBev or “if it was simply too slow.”
Laboy says Inbev is “likely coveting the opportunity” to coordinate the Anheuser-Busch and Grupo Modelo brands in the United States. The key Mexican brand is Corona. “Until they can be managed as part of the same portfolio, we believe that Modelo and A-B will remain on a collision course,” he said.
If it looks like Grupo Modelo might sell to the new company, its stock would rise. And if Grupo Modelo were acquired, “FEMSA may be next,” he said. The most obvious candidate would be SABMiller.
Robert W. Steyer is a free-lance journalist based in New York, who was previously with the Post-Dispatch.