This article first appeared in the St. Louis Beacon: June 25, 2008 - Belgian brewing giant InBev has sent another letter to Anheuser-Busch reaffirming its desire for a friendly acquisition, assuring that it has solid financing and warning that "time is of the essence." InBev's letter -- its third -- was the equivalent of writing the word "friendly" in capital letters with several exclamation marks added for emphasis.
"The letter was friendly - but it was forward," says Ann Gilpin, an analyst with the independent financial research firm Morningstar. "The Anheuser-Busch board knows it's running out of options. With this letter, they know they're running out of time."
InBev has stepped up the pace of this merger mating dance. On Thursday, it filed suit in Delaware where A-B is chartered to confirm that shareholders can oust A-B directors -- a move that may be the opening gambit in a hostile takeover. Click here for more details.
Gilpin and other observers say InBev has adroitly approached the merger mating dance -- giving Anheuser-Busch's board time to assess the offer but also exerting pressure by revealing the correspondence with the company.
Late Wednesday, the Wall Street Journal was reporting that Anheuser-Busch was poised to reject the deal. The board is apparently going to argue that the $65 bid from InBev undervalues the company. The A-B board may also be prepared to sell off certain assets like the theme parks -- although that may be easier said than done.
Still, Jack Russo, who follows Anheuser-Busch for the Edward Jones investment banking firm, says InBev has done a good job of handling its romance of Anheuser-Busch. "They have tried to work the media and the politicians," he explains. "They want this badly. They aren't going away."
Right now, experts say InBev's strategy is better than making a direct appeal to shareholders via a tender offer for their stock, thus bypassing the board.
Such a quick move would be "filled with hostility," says Morningstar's Gilpin, adding that it would send an ominous signal to the many executives and employees whose expertise is needed to make a merger work. Anheuser-Busch has nearly half of the U.S. beer market; InBev is only a minor player.
InBev is being firmly friendly in part because Anheuser-Busch has no immediately obvious rebuttal to the $65-a-share bid on a purely investment-oriented basis. InBev's offer places a value on the St. Louis company's stock has never been achieved.
"There's no dispute there's a premium [in InBev's offer], but the board has to decide if the premium is large enough," says Anjan Thakor, professor of finance at Washington University's Olin School of Business.
"The difficulty here is that we don't know what management's strategy is and how it will be reflected in the future stock price - or how investors will perceive that strategy," he says.
Until rumors started in late May about an InBev offer, Anheuser-Busch's stock had been in the doldrums for five years, drifting in the low $50s.
With an offer of $65 a share, "management doesn't have a whole lot of wiggle room," says G. D'Anne Hancock, associate professor of finance at the University of Missouri-St. Louis College of Business Administration. "I don't think A-B can argue that they can achieve more per share on their own."
InBev CEO Carlos Brito doesn't think so either.
"Our proposed price would deliver an immediate cash premium to your shareholders of 35 percent over the 30-day average share price prior to recent market speculation and 18 percent above the previous all-time high achieved for your shares in October 2002," says his letter to August A. Busch IV, the CEO of Anheuser-Busch.
"The market reaction to our proposal has been extremely positive. We believe this confirms our view that our proposal is the best way to achieve this transformational combination for all constituents," the letter says.
Brito says the deal is so good that InBev has paid $50 million to a group of international banks, which has agreed to finance the $46.4 billion InBev offer. InBev has said it would need to borrow at least $40 billion.
The banks are Banco Santander, Bank of Tokyo-Mitsubishi, Barclays Capital, BNP Paribas, Deutsche Bank, Fortis, ING Bank, JP Morgan, Mizuho Corporate Bank and Royal Bank of Scotland.
Barclays Capital's parent company owns Barclays Global Investors, which is the largest Anheuser-Busch shareholder with 6.1 percent of the stock as of March 31, according to Vickers Stock Research. The second largest shareholder, Warren Buffett, told CNBC and Reuters Wednesday that he hasn't taken sides on the deal. He owns just under 5 percent of Anheuser-Busch.
Analysts say the clock is ticking for InBev with respect to borrowing money. "Credit markets aren't loose and easy," says Hancock. If Anheuser-Busch tries to squeeze more money from a takeover -- some analysts predict InBev might go up to $70 a share -- the financing arrangement becomes more complicated.
"The more InBev has to pay, the higher price St. Louis will pay in terms of cutting costs and losing jobs," Hancock says.
"There's an old saying in negotiations: You don't bid against yourself," says Jack Russo, who doubts Anheuser-Busch would seek another buyer. Its directors will have to develop a "very daring and very bold" plan to convince shareholders it can achieve $65 a share on its own.
And even if the board presents a plausible strategy, he adds, "the plan may take years to play out while InBev is offering $65 a share now."
Robert W. Steyer, a freelance journalist living in New York, was a business reporter for the St. Louis Post-Dispatch.