Just begun to fight: A-B presents its battle plan | St. Louis Public Radio

Just begun to fight: A-B presents its battle plan

Jun 27, 2008

This article first appeared in the St. Louis Beacon: June 27, 2008 - Seeking to explain why Anheuser-Busch should remain independent, top executives say earnings for the next three years will be well above Wall Street estimates, thanks to the company's revised strategic plan.

These gains will be achieved in part by cutting costs and jobs -- but not by cutting assets, such as the theme parks or the packaging subsidiary, the executives said Friday.

The profit forecasts were part of a presentation to analysts and investors aimed at justifying Thursday's rejection of a $46.4 billion takeover bid by Belgium brewing giant InBev.

Anheuser-Busch's chief executive, August A. Busch IV, and chief financial officer, W. Randolph Baker, repeated their assertion that InBev's $65-a-share offer undervalued what their company could produce for its shareholders through its famous brands, revised strategy and efforts in international markets.

InBev hasn't issued a formal comment to the rejection or to Anheuser-Busch's strategic plan.

The news sent shares of Anheuser-Busch up 91 cents to close at $62.26. The stock rose as high as $62.80.

However, observers aren't sure if this gain reflected investors' faith in the company or speculation that InBev might raise its offer.

Jack Russo, of St. Louis-based Edward Jones, says the company did a "nice job" presenting a "believable" case to convince shareholders that they can enjoy $65-a-share with an independent company.

"The key word is urgency, and Anheuser-Busch responded in a believable and workable way," says Russo, who has a hold rating and doesn't own shares.

Although InBev has maintained that its $65-a-share offer is firm, some analysts have said it might go as high as $70 a share. Others say a higher bid would complicate InBev's plan for borrowing at least $40 billion to finance the deal.

"When you put a value on the cost-savings, it still doesn't bring you to $65 a share," says Michael Roberto, a professor of management at Bryant University in Smithfield, R.I. "This game is still to be played out. I don't think investors will be placated." Anheuser-Busch is "essentially doing what InBev would have done if it acquired" the company, adds analyst Ann Gilpin, referring to Anheuser-Busch's new cost-cutting goals.

"If you could wring out all these extra costs, why didn't you do so in the beginning," says Gilpin, who works for the independent financial research firm Morningstar.

She believes Anheuser-Busch is prodding InBev to pay more, adding that InBev may make a hostile bid -- via a direct appeal to shareholders for $65-a-share -- rather than raise its price.

THE NEW STRATEGY

Key elements to improving Anheuser-Busch's stock price include reducing jobs through buyouts and attrition; accelerating and widening an existing cost-cutting plan; raising prices; and expanding repurchases of stock.

The company is looking to cut 10 to 15 percent of its 8,600 salaried workers, with "early retirement packages" to be offered in the third quarter.

This is part of an expanded version of the company's "Blue Ocean" cost reduction plan. Originally, Blue Ocean was to have achieved $400 million in savings over four years; now the goal is $1 billion by 2010.

Most of the savings will come this year and next year. The savings will be "cumulative" and "sustainable," the company said.

Reduced labor costs and corporate overhead costs should save $300 million. Other savings will come from greater efficiencies in manufacturing and distribution. Capital spending will be reduced from an estimated $875 million this year to $725 million next year.

As a way of propping up its stock price, the company repurchased $2.7 billion in shares last year. It expects to buy back $3 billion this year, up from its original plan of $2 billion. It also expects to repurchase $4 billion in 2009 instead of the original goal of $1.8 billion.

These buybacks are "subject to potential acquisitions and investment opportunities," Anheuser-Busch said.

At the moment, Anheuser-Busch isn't buying or selling. Many analysts had expected Anheuser-Busch to sell the theme-parks and/or packaging units to raise money and help raise the stock price. The company said there was "no financial gain" in selling them.

Last year, these subsidiaries combined for 18 percent of corporate sales and 10 percent of net profit. The entertainment subsidiary profit will grow in the "high single digits" this year, but the packaging profit will drop by "low double digits," the Anheuser-Busch said.

Russo, of Edward Jones, said keeping the non-beer assets was a "surprise."

BIG PROFIT PREDICTIONS

The most dramatic comments Friday involved the gap between the company's earnings estimates and the average Wall Street forecasts compiled by the data firm Thomson Reuters.

Anheuser-Busch predicted earnings per share of $3.13 for this year versus a Wall Street consensus of $3.01. Next year, the company forecast earnings per share of $3.90 versus the analysts' average prediction of $3.29.

For the three years following 2009, the company looks for "double-digit" earnings-per-share growth from the base of $3.90. Predictions by the analysts polled by Thomson Reuters only go to 2010, and the average forecast for that year was $3.56 per share.

"These are very aggressive numbers," says Gilpin of Morningstar.

The company said second-quarter and third-quarter earnings per share growth should each be in the "mid-single digits." There should be "very strong" fourth-quarter growth, aided by a price increase that will raise revenue per barrel by 4 percent for the year. Profits from international beer operations should grow by 35 percent this year.

The company expects to achieve gain this year despite "unprecedented diesel fuel prices impacting wholesalers" as well as high commodity prices. Anheuser-Busch said it has "effectively managed" costs in relation to U.S. competitors.

Although InBev has far greater exposure to foreign markets, Anheuser-Busch said it expects "rapid growth" from its international beer operations, which now account for 27 percent of corporate net income.

Mexico's Grupo Modelo will be a "key contributor" to future profit growth, as will Anheuser-Busch investments in Chinese breweries. Anheuser-Busch owns 50.2 percent of Grupo Modelo but lacks operation control. It owns one Chinese brewery and 27 percent of another.

FUTURE BATTLES

Busch said his company will fight the InBev lawsuit filed Thursday in Delaware seeking a ruling on whether shareholders can kick out all Anheuser-Busch board members before the company's regularly scheduled annual meeting in April.

InBev contends that shareholders are allowed to petition the Securities and Exchange Commission to remove the board members by a process called written consent. The suit, filed a few hours before Anheuser-Busch rejected InBev's offer, was viewed by analysts as a hardball tactic by the Belgian company.

InBev argued that a change in company bylaws automatically means that eight directors could be ousted. Even though it believes the other five can be thrown out, InBev said it was seeking court clarification.

Even if InBev doesn't win its case, the company could hang around until the next Anheuser-Busch annual meeting in April and then stage a proxy fight to throw out the whole board, says Gilpin of Morningstar.

Busch repeated the company's comments on Thursday that although InBev's offer was inadequate, Anheuser-Busch is willing to consider any "strategic alternatives" that would be in the "best interests" of shareholders.

Analysts say these remarks represent both a wise strategy and a defense against lawsuits from angry shareholders.

"The A-B board has given InBev space to respond formally and request a face-to-face meeting with A-B," says Carlos Laboy, of Credit Suisse, a a note to clients issued after Anheuser-Busch rejected InBev's bid but before Friday's presentation. "We also anticipate that the request for this meeting will come with a deadline attached."

Anheuser-Busch could simply be biding its time, adds Roberto, of Bryant University. "Why play all your cards when you don't have to?" he asks. "They could be buying time for another transaction, or they may just be trying to get InBev to raise the price."

Robert W. Steyer, a freelance journalist in New York, was a business reporter for the St. Louis Post-Dispatch.