Rocky economy means a bumpy road ahead to A-B and InBev merger
This article first appeared in the St. Louis Beacon: October 10, 2008 - Four weeks ago, analyst Jack Russo told clients to sell their shares of Anheuser-Busch, which were then trading at $66.05. He looked like a genius; the stock remains below Russo's cut-off point.
On Monday morning, analyst Mark Swartzberg told clients to buy Anheuser-Busch. The stock looked like a bargain because it had closed at $58.50 last Friday. He looked like a genius -- at least for a few days.
The stock jumped to $63.93 on Monday. Then it started falling, sinking as low as $56.45 at one point on Thursday. On Friday, it bounced up to close at $62.65.
Why Russo, of Edward Jones, and Swartzberg, of Stifel Nicolaus, could both be correct is the conundrum of Anheuser-Busch's impending takeover by Belgium's InBev.
Anheuser-Busch's stock has behaved erratically this month. Because the stock has occasionally reached uncomfortable levels, some analysts wonder if the transaction might be delayed, restructured -- or even cancelled.
"It's hard to say right now," Russo says in a Friday interview. He maintains a sell rating even though be believes the deal might close before Thanksgiving. Except for U.S. regulatory approval, the Nov. 12 Anheuser-Busch shareholders vote is the last formal step to closing the deal.
However, deteriorating economies in the U.S. and Europe plus several unwelcome events have created uncertainty among investors. "There are so many permutations," says Russo, adding that he won't guess what might be featured in a revised agreement.
If the deal is called off, Swartzberg told clients in a recent report that Anheuser-Busch's stock could be knocked down to $35. He believes the deal has a 90 percent chance of being completed on time at its original price of $70 a share versus a 10 percent chance of cancellation. Neither Russo nor Swartzberg own shares in companies they cover.
"It's a dilemma," says Matt Hall, co-founder and principal of the Hill Investment Group in Clayton. "There are a lot of people at A-B who are confident that this will be completed by Thanksgiving. But the price of the stock reflects what the market thinks about the financing."
ON TIME DELIVERY?
InBev insists the deal will close by year-end as promised at the full price. It says the deal's financing will look the same as when InBev revealed its plan several months ago.
Amidst that declaration, however, InBev's stock has plunged to its worst level since July 2005, reducing its strength in the eyes of investors and the banks that are loaning money to finance the Anheuser-Busch acquisition. Since Labor Day, the stock is down 39 percent. It closed Friday at 29.88 euros, or $40.08.
The sinking stock forced InBev earlier this week to postpone raising $9.8 billion in equity to help finance the acquisition. InBev said the decision, which it attributed to "volatility in global capital markets," wouldn't affect the deal's closing.
InBev has a commitment for a $9.8 billion bridge loan -- temporary financing -- until it can seek a more attractive entry into the equity markets. InBev said it "reconfirms the strong support" its group of lenders, which is not only providing the bridge loan but also $45 billion to finance the bulk of the acquisition.
However, one of those banks, Fortis, recently needed an injection of capital from three European governments. Another lender, Royal Bank of Scotland, said earlier this week it will receive an infusion from the British government. The parent of a third lender, ING Bank, reported Sunday that the Dutch government would provide more than $13 billion "to strengthen its capital position."
InBev's withdrawing the equity offering wasn't a surprise to Ann Gilpin, of the independent financial research firm Morningstar. "The European equity markets have been hard hit in recent weeks, and it would be unwise for InBev to issue equity at such depressed prices unless it was absolutely necessary," she says in an Oct. 14 report to clients.
Although Gilpin expects the Anheuser-Busch takeover will be completed, "there are many uncertainties in today's credit market and we are cautious of any delays or stumbling blocks to the acquisition," she adds.
Uncertainties caused UBS Securities to cut its rating on InBev to sell from hold, citing the "high" financing risk in the current economic climate. "Not out of the woods yet for A-B deal financing" is the headline for the Oct. 14 report.
THE NEED FOR SPEED
InBev wants to move quickly to complete the transaction, which has been approved by its shareholders.
InBev has been encouraged by Anheuser-Busch's strong third-quarter beer sales and by the quick agreement with the leaders of the Teamsters union on a five-year contract. The current contract expires Feb. 29. Ballots were mailed Thursday to members who will vote Nov. 6.
InBev wants to move fast so it can sell $7 billion in "non-core" assets to help pay for the deal. InBev hasn't identified the assets from the two companies, but analysts believe Anheuser-Busch's entertainment division is a prime target.
With the decline in the U.S. and European economies, however, "that's a tough proposition whether you want to sell a house or a theme park," says Russo.
One possible speed bump is Mexico's Grupo Modelo, which just filed an arbitration claim in Mexico objecting to how the InBev takeover has unfolded. Anheuser-Busch owns 50.2 percent of Mexico's largest brewer, but it lacks operational control.
Grupo Modelo argues that it wasn't consulted on the deal, adding that its rights were ignored. The arbitration claim relates to language in the 1993 agreement in which Anheuser-Busch first bought 17.7 percent of Grupo Modelo.
According to Mexican law, the contract "prohibits Anheuser-Busch from taking actions that would result in a transfer or disposition of its interests [in Grupo Modelo] to a competitor in the beer business," the Mexican brewer says.
The contract prohibits Anheuser-Busch from transferring or selling its Mexican brewer's stock "without first giving the controlling shareholders of Grupo Modelo an opportunity to purchase the shares," the arbitration complaint says.
Anheuser-Busch says it will "vigorously contest" the claims. Both InBev and Anheuser-Busch say the arbitration claim is "without merit," adding that they expect the takeover to proceed on schedule.
Analysts say the contract language is unclear as to whether Grupo Modelo can thwart the deal. Some speculate it is simply seeking more leverage with -- or money -- from InBev. However, Credit Suisse analyst Tufic Salem recently told clients that Grupo Modelo has a "weak" position based on the arbitration process.
"Struggles on the operational side should erode Modelo's negotiation levers even further," says Salem, who is neutral on the company. "Modelo is now running out of time to fetch an attractive deal out of the negotiations with InBev."
BUY, SELL, HOLD?
These events are causing consternation among shareholders. Although big institutional investors will control the Anheuser-Busch vote, many Anheuser-Busch employees, retirees, workers in affiliated businesses and everyday St. Louis investors are perplexed.
When Anheuser-Busch's stock was trading in the mid- to high $60s a few weeks ago, Pamela Kuehling told her clients to take the money and run. "The correct answer is to manage your fear and greed," says Kuehling, vice president for wealth management at the Chesterfield office of Citigroup's Smith Barney financial advisory unit.
Kuehling says her advice is both deal-related and tax-related. "InBev overbid for A-B," says Kuehling, adding that her advice isn't affected by official Citigroup-Smith Barney recommendations on companies.
"They have the perfect opportunity now to call this off and come back in a few months and offer $62 a share," she says. However, if Anheuser-Busch's stock stays below $60, her advice to clients becomes "more iffy," she says.
Kuehling says investors also must take into account the upcoming election. If Barack Obama becomes president and Democrats control both the House and Senate, she believes capital-gains tax rates will rise. Clients holding Anheuser-Busch stock in taxable accounts would be wise to sell this year rather than risk having the deal delayed or cancelled, she says.
"When the stock was at $67 or $68, we told our clients not to buy any more for their 401(k) plans,'' says Rick Hill, co-founder and managing principal of Hill Investment Group. He worked for Anheuser-Busch for 24 years, retiring in 1997 as assistant treasurer. About 40 percent of his clients are Anheuser-Busch employees or people who work for companies, such as wholesalers, that do business with the brewery.
Hill has counseled clients to sell some of their shares if they own a lot of Anheuser-Busch stock. However, as Anheuser-Busch's stock has slipped recently he told clients with a large amount of shares to refrain from buying more. Other clients "might make some small purchases" for the 401(k) plans.
Hill advocates passive investing, so he doesn't want his customers trying to time the stock market even though he worries that Anheuser-Busch's stock could drop into the $40s if InBev cancels the takeover.
Judging from Anheuser-Busch's recent stock activity, "there are enough question marks out there that people must be concerned," he says.
Robert W. Steyer is a freelance business journalist in New York.