Would Buffett Play a Role in InBev's Acquisition of BUD?

I have always had warm feelings towards Anheuser Busch (BUD). Growing up in the St. Louis area I couldn’t help it – afternoons at Grant’s Farm, countless Cardinal games at Busch Stadium and the occasional brewery tour. AB is all around you in that town. And it is a good kind of omnipresence. In spite of the differences and segregation with which the city constantly battles, everyone can be proud living in the home of the largest brewer in the world.

So with the proposed acquisition of AB by InBev, St. Louisans are in a complete tizzy. I was contacted by a reporter from St. Louis Post Dispatch on Tuesday wanting my opinion on what role Buffett might play in the deal, given Berkshire's 4.8% AB stake. I wish he had waited a few days to ask because I hadn’t given it much thought (thus missing out on another opportunity to get quoted) other than my initial gut reaction which was sadness that our town could lose yet another large corporate headquarters. But since then I have done a lot of thinking about the deal.

I own AB shares. In fact I bought at $48 them just before Berkshire’s (BRK.B) stake was disclosed a few years ago. So it is great that we now have a nice 30% gain, but in the same way I had mixed feelings about the acquisition of Wrigley (WWY), I am uncertain of my opinion on this one.

It is a great company generating enormous returns on equity - in no year since 1994 has it returned less than 25%. Unfortunately the company has found ways to destroy value just as quickly as it is created – book value per share has also remained flat over this time. But the company does have an extremely valuable brand that rivals the strength of Coke (KO) and this has kept price-to-book as well as PE’s pretty lofty. So perhaps, just maybe, InBev could come up with better places to deploy the shareholders’ capital. It wouldn’t seem it could do any worse.

But these are AB concerns, not InBev-AB concerns. And when considering what InBev can bring to the table I don’t see Warren Buffett resisting. His only objection might be the terms of the deal, which is currently all cash. Just as he did with the P&G (PG) acquisition of Gillette, he would be wise to negotiate a stock swap instead, deferring the taxes on his gains and also giving him continued exposure to this fantastic business. I am fairly sure he could care less about the extra $2.3 billion in cash that would end up on Berkshire’s balance sheet and would much rather have a few million shares of InBev, a good company in its own right, instead.

Nevertheless, rest assured that if Buffett backs this deal as he should, it will sour his popularity among the fools that know nothing else about him. But remember what they say about a fool and his money.

To see what type of irrationality St. Louis is currently dealing with consider the following as evidence.

Politicians are generally pretty stupid I think, at least when it comes to business and economics. Ordinarily this doesn’t bother me, but when they try to speak as an authority I can get pissed. An example is the genius that our state sent to Washington a few years back, Democratic Senator Claire McCaskill. Not surprisingly she came out screaming when the InBev deal was proposed. Check out the following from an article in the Post Dispatch (original here) on Wednesday:

McCaskill blasted the deal as one designed to give "premium profit for hedge fund investors." She said A-B is a strong company that has provided thousands of good middle-class American jobs. "This is not a company that's in stress." Addressing concerns about a foreign firm taking over an American icon, she added: "We do not have a 'For Sale' sign on our front lawn in America."

There is so much ignorance in that paragraph I really can’t even believe the paper printed it. Or maybe I can.

The first statement about hedge funds is just completely baseless - total political pandering. The largest shareholder of AB is Barclays, at a mere 5.1%, after that is Berkshire then the Busch family. Even if all of Barclays’ stake is held through hedge funds, I wonder where she thinks the remaining 94.9% of the premium profits are going. Clearly this woman thinks she is speaking to a very ignorant constituency whom she probably assumes a) is not invested in AB themselves and b) doesn’t even know what a hedge fund is.

While she is correct that “A-B is a strong company that has provided thousands of good middle-class American jobs,” this fact is not threatened by the takeover. If jobs are to be lost as a result of this deal they will be the upper-level management jobs, not the blue-collar factory jobs I am sure she is worried about. InBev has made no indication it plans to move stateside breweries overseas – nor would this seem to be a wise business decision.

McCaskill also seems to need a lesson in M&A. A company need not be “in stress” to be a takeover candidate. How dumb would InBev need to be to pay that “premium profit to hedge fund investors” if the company were in stress? AB’s strength is the very reason it is a target! Duh!

Finally, and most hilariously, McCaskill claims "We do not have a 'For Sale' sign on our front lawn in America." Oh really? I got news for you lady. That is exactly what we have on our front lawn. For decades now we have been shipping our dollars overseas, effectively selling off small pieces of the farm to finance our overspending. What do you expect other countries to do with all those greenbacks, stuff their pillows? As a result of this trade imbalance, of course, InBev’s euros are at an all time high against the dollar.

What I gather from all this is that, at least locally, there is too much sentimentality at play and far too little rational business deliberation. Further, people are dumb. And when you mix sentimentality with ignorance you are left with a lost opportunities.

Full Disclosure: I own shares of BUD, BRK.B and WWY. I have no position in InBev, KO or PG.

Comments

[User 36911]

This article is closer to the truth and makes more sense then anything I've seen

[DurkABCol]

The hedge fund and get rich quick "investors" is what drove the price up to its current price. CNBC made that clear. Barclays and Berkshire have been in the stock for awhile and didnt just jump aboard like the hedge funds did. The only ones i hear crying about the offer is they want there profit. Have you heard a comment from Buffett Or Barclays? These guys are in a stock for long term. If the Anheuser Busch board can show them there strategic plan that has been in effect for about a year now "blue ocean" they will see that there return on investment in 2-3 years will be worth the wait. One firm said they have BUD stock at 65/share in 2 years anyways. And if anyone believes that lying sack of S^&T Brito that hes not going to close any brewery and keep Grants Farm or sell off the theme parks and keep the Clydesdales are freaking crazy. Brito is going to HELL for all the lies that has come out of his mouth. Do some research and look at the lies that comes out of his mouth when they buy a brewery, all the promises. I say screw InBev and i think Buffett will say the same after he meets with the IV.

[truthinvesting]

the author proves he is intelligent and claire mccaskell isa moron

[boris123]

I did not understand a word DurkABCol said.

[DurkABCol]

well boris123 apparently you dont have a clue about how inbev works or what lies they tell to pursuade a company to sell. I bet you were one of the ones that bought in at 60/share just to ride the coat tails of the hedge funds that drove the price up looking for a quick buck at the expense of decent middle class jobs. do some research on inbev and then make a statement

[good]

DurkABCol, i don't think you understand free market dynamics nor do you understand basic economics. Furthermore America is based on capitalism not socialism, if you want that go back to russia comrade

[jcordes]

It is well accepted that Budweiser's stock has been flat a long time oweing to high overhead costs, marketing etc. They have lost market share to both foreign rivals including Miller and Molson/Coors. Patriotiotism of beer drinkers is hardly a viable arguement to artificially prohibit the buy out. Inbev/Ambev are desperate to overcome export costs related to foreign exchange and for shelf space. It is a very sensible deal for them, and the last thing they would want to do is shut down or even reduce their new domestic manufacturing presence for which they have dearly paid to acquire. It's good for the stock price, it's good for the company and for domestic jobs. If the deal goes away BUD will likely return to pre-buyout rumor prices in the upper-forties.

[Kiwa]

InBev's history of labor violations should prohibit it or any other company with a similar track record from owning AB or any other company within the U.S. no matter what the price offered is. Just because a few quick buck artists can make money at the expense of employees and communities doesn't equal capitalism. That's why the country is where it stands today. Short sighted schemes with a disregard for all of the people involved. Deals that send more and more money abroad or into the pockets of a wealthy few have left us being the worlds biggest debtor nation. In the big picture this is just one more nail in the coffin of our country. Fencing stolen goods is a form of capitalism also. That in itself doesn't make it moral or the right thing to do, even if it were legal.

[jcordes]

Kiwa;
You may have noticed that morality is not a driving factor in markets. Now AB is proposing to cut thousands of jobs to counter the offer and boost net revenue as a stock price defense. Whose the viticim? Not the stock holders, many of which are employees in their 401K's. The notion that a foreign buy out is inherently bad because it's foreign is simple xenophobia, unless you think this whole free trade thing should be tossed.

[bvictor33]

It's amazing how much patriotism is getting in the way of what is obviously a profitable move for BUD and its shareholders. Investors must have missed this lesson: Don't let your emotions get
in the way of your investments.

It places too much sentimental value on the Company.

Instead of holding on to BUD for dear life, check out this article about how to make a profit by using puts and
calls. www.greenfaucet.com/fu...-...
Pretty interesting stuff, and depending on what you think is going to happen, there is a lot of room for profit here.

A lot safer than holding and hoping. Check it out.

[Tarheel]

I purchased some shares in 1994 @ $50.13 and again in 1994 @ $54.30. I have taken the cash dividend since owning 1.e. not Drip. BUD split 2 for 1 in 1996 and 2 for 1 in 2000.

I don't want to lose my interest in BUD nor do I want the capital gained by the $70.00 per share buyout ( or the tax associatedwith a substantial profit even at the 15% rate ) I had planned to leave this equity in my estate which could be sold by my heirs with a zero basis.

Question: Will shareholders be offered the opportunity to choose between:

1. rejecting the offer period

2. accepting $70 per share

3. or a stock swap ( my preference )

[Tarheel]

Anybody listening to SaveAB.com ?