Despite darkening economic climate, AB/InBev merger is on track
This article first appeared in the St. Louis Beacon: September 30, 2008 - A darkening economic climate is making the path to InBev's purchase of Anheuser-Busch a bit more interesting than the companies had hoped.
Financial turmoil in the United States, a bond-rating firm's downgrade and a multibillion dollar infusion for one of InBev's lenders have tossed unwelcome headliness in the way of a deal that the companies and analysts still say will completed by year-end.
"Although the risk profile has increased, we still expect the deal to go through," says Jack Russo, who follows Anheuser-Busch for Edward Jones. "There's not enough facts to say that the deal is in jeopardy."
Russo cut his rating on Sept. 16 to "sell" from "hold" when Anheuser-Busch closed at $66.05, citing "fragile credit markets" and a concern about InBev's financing plan. Russo doesn't own share in Anheuser-Busch or InBev. (His firm says it expects to receive or intends to seek compensation from Anheuser-Busch for investment banking services within the next three months.)
Russo says the sell order was aimed at conservative investors who would be more comfortable with that sum now rather than waiting for the full buyout price of $70 later.
Although Anheuser-Busch's stock has dipped as low as $62.80 since InBev raised its offer from $65 to $70 in mid-July, the current stock price appears to reflect more market uncertainty than deal-specific nervousness.
"Given the state of the credit markets, it's easy to see why some people have concerns over the closing of the deal," says B. Craig Hutson, a senior bond analyst at the independent credit research firm Gimme Credit. "It still looks like the timeline is OK. The deal makes sound strategic sense."
Anheuser-Busch's price hit $62.80 during Monday's 777-point drop of the Dow Jones Industrial Average; but by Tuesday, it closed at $64.88 as the Dow gained more than 485 points. Tuesday's Anheuser-Busch price is within an acceptable range for risk arbitrageurs -- investors who bet on mergers and acquisitions -- to believe the deal will succeed.
Although takeover has unique characteristics, the rule of thumb is that the "arbitrage spread" percentage would have to be 12 percent to 15 percent before investors might question the deal's chances.
To calculate this percentage, subtract the current price of the takeover target's stock from the buyout price; and then divide that number by the target's current price. At just under $65 a share, this produces about an 8 percent spread. At about $63 a share, the figure moves up to 11 percent.
"In light of the current economic conditions, (the arbitrage spread percentage in) high single digits isn't a big red flag," says Hutson.
However, he predicts the cost of financing for InBev will rise due to the economic downturn. "Whatever financial returns InBev modelled initially will be less than expected," he says.
THE COST OF MONEY
InBev's takeover will be affected by tightening credit markets and lower bond ratings.
On Monday, Moody's Investors Service cut its long-term rating on Anheuser-Busch to Baa2, one notch above the minimum investment grade. Previously, the rating was A2, an upper medium grade that is three levels higher than the new rating. Moody's also gave InBev a Baa2 rating.
Lower ratings mean higher costs of borrowing. Although Anheuser-Busch's stock won't trade after the InBev takeover, the debt remains. Moody's cut the Anheuser-Busch rating because the combined company, which guarantees the Anheuser-Busch debt, will have a credit higher risk than an independent Anheuser-Busch.
"Although InBev will have limited flexibility after the acquisition, Moody's assumes that it will carry out a prudent financial policy after the transaction," the ratings firm said Monday.
InBev has promised to cut costs, issue equity and sell "non-core" (not yet named) assets to pay down debt from borrowing $45 billion to finance the takeover. InBev told investors, analysts and rating firms frequently that it would establish a financing package that would insure it maintained an investment grade rating.
"InBev has demonstrated in recent years its ability to achieve targeted cost savings" following other mergers, Moody's said Monday. However, the firm warned "negative pressure could build on the rating" if InBev doesn't make good on its equity-raising and asset-selling plans.
Standard & Poor's Corp. hasn't changed its analysis of Anheuser-Busch since it issued a BBB-plus rating -- two notches below the minimum investment grade -- on July 14.
InBev learned on Monday that Fortis, one of the 10 giant international banks financing the Anheuser-Busch deal, required an infusion of 11.2 billion euros, or $15.8 billion, from the governments of Belgium, Luxembourg and the Netherlands as part of a bank restructuring.
Fortis said it needed the money "due to the deteriorated business environment" and the need to reduce the risk on its balance sheet.
The financial aid is "a sign of confidence in Fortis and of comfort to customers and all other stakeholders alike," said the bank's CEO-elect. "These actions ensure the financial strength and stability of our company going forward."
Analysts Russo and Hutson say they can't determine if the Fortis situation will affect the takeover of Anheuser-Busch, although they note that InBev made sure it spread the cost of the deal among many giant banks to reduce the risk. Neither InBev nor Anheuser-Busch has commented about Fortis.
InBev's shareholders supported the takeover on Monday. Anheuser-Busch hasn't set a shareholder vote date. Their vote and approval by regulators are the final steps to completing the deal.
"InBev wants to get this deal done," says Russo, adding that the Belgian brewer has the incentive to complete the transaction before Anheuser-Busch pays a quarterly dividend s in December.
Although Anheuser-Busch hasn't set a payment date, last year it paid a fourth-quarter dividend on Dec. 10 to shareholders of record on Nov. 9. With about 720 million Anheuser-Busch common shares and a per-share dividend of 37 cents, InBev could save itself $266 million if the deal is completed quickly, Russo says.
Robert W. Steyer, a freelance journalist in New York, covered business for the St. Louis Post-Dispatch.