Bid For Anheuser-Busch Really Hits Home

After being born and raised in Baltimore, I traveled out to St. Louis for college and subsequently spent a decade there. The long rumored InBev hostile merger offer for American icon Anheuser-Busch (BUD) came true on Wednesday, as the maker of Budweiser confirmed they had received an unsolicited $65 cash bid.

InBev has a reputation for buying up competitors and slashing costs (read: jobs) to boost efficiencies, profit margins, and as a result, its stock price. As a result, news of this bid really hits home and comes with very mixed emotions. My company owns shares of BUD for some of its clients, so that is good from an investment standpoint, but that about the only positive I can see from my perch.

I have friends who work at the A-B (as it’s known locally) global headquarters in St. Louis so their job security is in question all of the sudden. Whether it be Busch Stadium (home of the Cardinals), Grant’s Farm, or the St. Louis Zoo (free to the public thanks to subsidies from BUD), the city really would take a hit if an InBev/A-B combination resulted in dramatic change.

Upon seeing the press release yesterday afternoon, I quickly sent off an email to a client and close friend working there, to which he replied with a single line:

“Top 5 worst news I’ve received in my life.”

This hostile battle is going to get ugly. BUD will have shareholders who want to take the deal and employees, supporters, and customers who will be firmly against it. After seeing another company with very little leverage turn down an excellent bid (Yahoo), it is certainly possible that A-B could rebuff InBev, although doing so will draw lots of commotion within the investment community.

As you can see from the chart below, BUD shareholders have not had much to smile about this decade, and this deal certainly would boost earnings and the combination’s share price.

The question is, at what cost? Would the brand be tarnished in any way if InBev’s cost cutting managers arrived on the St. Louis campus? It is hard to know.

Normally, as an investment manager I would be jumping for joy at the possibility of getting $65 for shares that not too long ago traded in the high 40’s. But this is far from a normal situation for many of us with direct or indirect ties to the company.

For non St. Louisans, the key question is what to do with the stock (now trading at 63 and change in pre-market trading). Given the local disapproval of a deal, coupled with it being an election year and oversea buyouts/job loss being a hot button political issue, I would say the odds of a consummated deal are no better than 50/50 at this point.

Given that the stock was hovering around $50 before InBev rumors started, and an eventual deal could range between $65 and $70 (if they are forced to sweeten the offer to secure BUD), an expected value on the stock sits in the $58-$60 range. With a current price in the $63 area, it seems reasonable to consider selling a portion to lock in gains and guard against a blocked deal, which could certainly happen.

Full Disclosure: Long shares of BUD at the time of writing

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2 Thoughts on “Bid For Anheuser-Busch Really Hits Home

  1. Anonymous on June 12, 2008 at 10:45 AM said:

    Interesting perspective. This is a great American brand that probably should be kept independent. So maybe shareholders can make out like bandits and it can stay that way…why would Buffett not buy this thing? He could probably step in with a similar offer and have the board accept it without sweetening it because he can make promises that he’ll keep the business independent. It’s not too large for him, at ~$45 billion less the 5% he already owns. At current prices, we’re talking about a business that isn’t going anywhere, with over a 5% free cash flow yield and growing. Not a crazy valuation by any means for a business of this caliber. He may not like the management well enough, though. Subsidies for free zoo visits sounds a little excessive…I hadn’t heard that one.

  2. j. / marketfolly on June 12, 2008 at 5:24 PM said:

    yea very tough to swallow for an american icon of a brand to be owned by foreigners. interesting to see how it plays out, as they don’t have much defense in place should a hostile takeover arise

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