This article first appeared in the St. Louis Beacon: June 12, 2008 - At $65 a share in cash, the unsolicited offer from Belgian beer giant InBev for Anheuser-Busch is one that shareholders will have trouble refusing and that management will have trouble repelling.
"This cash offer indicates that InBev is confident it can generate all the synergies that it has talked about," says Ann Gilpin, an analyst at the independent financial research firm Morningstar. "Our fair value for Anheuser-Busch is $57 a share, so I think it will be pretty hard for the board to convince shareholders that they can achieve this on their own."
After markets had closed on Wednesday, InBev announced what it termed a friendly offer worth about $46.4 billion. Anheuser-Busch is the biggest U.S. beer maker; it is the world's third largest brewer behind InBev and SABMiller.
Although the offer prompted predictable responses from Missouri politicians and created anguish among St. Louisans fearful of losing another corporate headquarters, financial observers say Anheuser-Busch has limited defenses partly because the stock has been flat for five years.
"Theoretically, I don't think there's any way they can stop it," says G. D'Anne Hancock, associate professor of finance at the University of Missouri-St. Louis College of Business Administration. "They can make (a takeover) more expensive."
Some analysts have been suggesting that Anheuser-Busch might try to push up the price as a way of dissuading InBev. But the Belgian beermaker has been a relentless acquirer of companies worldwide, and other analysts believe it will be a patient, persistent pursuer.
To demonstrate its friendship, InBev promised to keep all 12 Anheuser-Busch's breweries open; "seek to retain key members" of management; and invite "a number" of Anheuser-Busch directors to join the board of the combined company.
InBev said it would create a name for the combined company "to evoke Anheuser-Busch's heritage." St. Louis would be the headquarters for InBev's North American operations. InBev has a tiny presence in the United States, and that's the reason analysts doubt there would be antitrust implications in its takeover offer.
Anheuser-Busch issued a terse statement Wednesday, saying directors "will evaluate the proposal carefully and in the context of all relevant factors, including Anheuser-Busch's long-term strategic plan."
Adding that a response will come "in due course," the statement said the board "will pursue the course of action that is in the best interests of Anheuser-Busch's stockholders."
This response was "by-the-book," says Marc Greenberg, a Deutsche Bank Securities analyst, in a Thursday research note to clients. "But this is an opening salvo....Now comes the real intrigue."
AGREE OR FIGHT
Investors and analysts have had a few weeks to contemplate a takeover possibility, ever since a Financial Times blog reported on May 23 that InBev was contemplating a takeover. The blog's discussion of the offer price was right on the money; and Anheuser-Busch's stock rose almost 8 percent to $56.61 a share on the day the report appeared.
In early trading June 12, Anheuser-Busch's stock was up about 6.3 percent to $62 a share.
Because rumor has turned into reality, analysts and local residents are reviewing scenarios in which the deal could be consummated or rejected.
The simplest scenario features shareholders deciding to "take the money and run," says Gilpin. With the Busch family reportedly holding only about 4 percent of the stock and no institutional shareholder owning more than 6 percent, there doesn't appear to much built-in resistance.
Filings with Securities and Exchange Commission and data from Vickers Stock Research show that the biggest shareholder is Barclay's Global Investors (6.13 percent). This investment banking firm is owned by the British financial services giant, which has another unit pledging to help InBev borrow money to finance the takeover.
The second biggest Anheuser-Busch shareholder is Warren Buffett's Berkshire Hathaway (4.99 percent). Eight other institutions, including the Vanguard and T. Rowe Price mutual fund firms, own between 3.34 percent and 1.21 percent. None could be considered aggressive investors.
The only family members identified in SEC documents are directors August A. Busch III, the former chairman and CEO, who owns 1.2 percent, and August A. Busch IV, the current CEO, who owns 0.40 percent. The 33 directors and executive officers, including the two Busches, own 4.5 percent.
JUDGMENT OF THE MARKET
The first indicator of how the offer is being received will be Anheuser-Busch's stock price during the days and weeks before Anheuser-Busch's board makes a decision.
If the market price stays relatively close to -- and just below -- the offer price, that indicates big investors, including arbitrageurs who bet on takeovers, believe InBev has made a fair offer.
If the market price falls well below the offer price, that suggests financiers think something is wrong with the deal, or they believe InBev might have trouble raising money.
This scenario seems remote. InBev said Wednesday it has received "strong support" from at least eight financial institutions, which are "prepared to provide all of of the financing" to seal the deal.
InBev predicts its purchase will be based on borrowing at least $40 billion, divesting "non-core assets" and equity financing. It didn't provide details.
"If the transaction makes sense in economic terms, they can raise enough money," says Stuart I. Greenbaum, former dean of the Olin School of Business at Washington University.
Investors also should beware if Anheuser-Busch's market price exceeds the offer price even by a small amount. This suggests finance experts believe Anheuser-Busch might seek a higher bid from InBev or look for another suitor. "I doubt there would be a white knight," says UMSL's Hancock, referring to a replacement suitor.
Morningstar's Gilpin says other logical buyers, based solely on their size and presumed ability to outbid InBev, would be SABMiller, which owns Miller Brewing Co., and Diageo.
But South Africa's SABMiller would run afoul of antitrust regulators, Hancock says. Anheuser-Busch has nearly half the U.S. market share, and the recently merged U.S. operations of SABMiller and Molson Coors have nearly 30 percent.
Although London-based Diageo sells Guinness and a handful of other beers, most of its revenue comes from hard liquor. "I don't think Anheuser-Busch fits with Diageo," Gilpin says.
InBev says it is trying to "engage in a dialogue" with the Anheuser-Busch board to create a "friendly combination."
The Belgian brewer released a June 11 letter sent to August A. Busch IV, noting that InBev executives "over the past several years" have met with Busch "on many occasions" in an effort to "deepen the relationship" between the companies.
The most recent meeting was on June 2 in Tampa, Fla., between Busch and two top InBev executives in which, InBev says, Busch asked if they had a formal proposal. Nine days later, InBev made its bid.
The letter, from InBev CEO Carlos Brito, said his offer didn't require any public disclosure by Busch. "We would prefer to engage in a dialogue with you and your board regarding our proposal," the letter says.
Management experts say InBev is making the right move by approaching the board first. If the board rejects the bid, and InBev doesn't raise the price, InBev could directly appeal to shareholders.
"We would not be surprised if the board rejected InBev's offer," says Todd Duvick, a credit analyst for Banc of American Securities in a Thursday report to clients. It's possible InBev could raise its offer, says Duvick, who has a sell rating on Anheuser-Busch debt.
"We believe the potential rejection of a $65 bid - a price level never attained by Anheuser-Busch' stock - could create discontent among Anheuser-Busch shareholders," he adds.
And if things get really nasty, InBev could petition shareholders to replace Anheuser-Busch board members. "There could be a lot of drama," Gilpin says.
Anheuser-Busch once used a system of staggered elections, in which only a several board members were nominated or re-nominated each year. This practice protected management from being voted out quickly by a hostile suitor. The company changed its rules; and next April, all board members will stand for re-election at the same time.
Deutsche Bank Securities describes the prospect of InBev appealing directly to Anheuser-Busch shareholders as a "brute force approach."
If it is rebuffed by the board, InBev may react angrily because its "financing package likely has a limited time frame," the investment bank says. "The clock could run out on a long proxy fight or battle or battle of wills between the boards." Deutsche Bank has a hold rating on Anheuser-Busch's stock; the firm has provided non-investment banking services to the brewer recently.
Analysts say Anheuser-Busch can take several actions to try to make InBev think twice, such as buying the 50 percent stake in the Mexican brewer Grupo Modelo that it doesn't already own.
A recent report by Merrill Lynch, issued before the InBev bid, says this stake would be worth about $10.9 billion. If Anheuser-Busch bought out its Mexican partner, "this would make A-B more expensive as a purchase for InBev," the report says.
Morningstar's Gilpin says the board also could take on more debt by voting a special dividend to existing shareholders.
Anheuser-Busch also could enact a "poison pill," a financial device that enlarges the expense of a suitor deemed hostile by management. Corporate governance watchdogs say this defense hurts shareholders; and Anheuser-Busch let a previous poison pill expire several years ago.
These defense mechanisms don't need immediate shareholder approval, and it appears the Anheuser-Busch board could vote for one quickly. Poison pills usually have a common theme: If an unwanted suitor acquires a certain percentage of a target's stock -- usually 10 percent to 20 percent -- existing shareholders can buy more stock at a big discount. This strategy dilutes the invader's ability to launch a takeover.
"Absent a poison pill, directors can say that an offering price is inadequate," says Washington University's Stuart Greenbaum. "They could say something like their own strategic plan would produce a bigger share price and thus defend turning down the offer."
Board members can't just pick a number out of a hat; but if they show they made a good faith estimates and exercised care and loyalty to shareholders, they should be able to be protected from shareholder lawsuits "even if they made a mistake in judgment," Greenbaum says.
Some analysts have already speculated that the buyout price might be pushed to $70. That would be good for Anheuser-Busch shareholders, but it wouldn't help hometown morale.
Robert W. Steyer, a freelance journalist living in New York, was a business writer for the St. Louis Post-Dispatch.