Sunday, June 1, 2008

1+1 = 3 and the Possible End of Budweiser

InBev sounds like they will make a bid for Anheuser Busch. The price tag is around $50 billion, and headlines are reporting the financing is all but secured. The takeover bid sounds like it might end up hostile, as AB has few options. For those who have never heard of InBev, InBev owns such brands as Bass and Labatt. The company was formed after a merger between AmBev and Interbrew.

In mergers and acquisitions, the acquirer pays for assets and cashflows, while seeking to cut out redundant costs that will help boost operating margins. News of InBev's possible intent surfaced on May 23rd. Prior to the announcement, BUD shares were trading at $52.65/shr. With 713 million shares outstanding, this put BUD's pre-announcement market cap at ~$37.5 billion. At $50 billion, the premium that InBev is willing to pay is about $12.5 billion, or 33% above the pre-announcement price. Put another way, the $12.5 billion represents the amount of "redundant costs" or synergies, the new, merged company needs to realize. BTW, InBev is only worth $30B currently.

This new merged company could realize this $12.5 billion of incremental shareholder value over the current separate companies by growing the top line or cutting costs. Either way, the $12.5 billion is an enormous amount of "value" that current BUD shareholders must ask, "could our current management's strategy generate the same amount of shareholder value versus what the merged company will?" It's the same question Electronic Arts (ERTS) asked Take Two (TTWO) shareholders to think about, as well as what Microsoft ask current Yahoo! shareholders to ask its leader, Jerry Yang.

Another big part of this deal that is gaining lots of attention is the obvious culture clash that seems to be brewing. The Brazilian beverage company, InBev, is fairly cut-throat, so this American icon will be severely tested if the deal goes through. I'm sure Congress will get involved with a foreign based company potentially buying an American icon. Sovereign wealth funds are welcome to strengthen our investment banks' balance sheets, but please don't take our beer.

Link to lecture by Carlos Brito, CEO of InBev

Link to Seeking Alpha post on Culture Differences

Link InBev Corporate Site

Link to Anheseur Busch Corporate Site