By David Silver
Ding Ding Ding... The two heavyweights are in their respective corners. First, we have the champion from St. Louis, with nearly a 50% market share of the United States beer market, coming in with a market cap of $44.2 billion, Anheuser-Busch (NYSE:BUD). In the opposite corner, we have the challenger, the second largest brewer (in terms of volume) in the world, a Belgian-Brazilian behemoth that combined the work ethic of Carlos Brito's AmBev with the beer genius of Interbrew, to form InBev.
InBev threw the first punch with its $65 share offer, but Anheuser-Busch [AB] counters with its own combination; rejecting the acquisition offer and outlining a plan to increase its shareholder value. We have previously said that the combination would be good for both parties involved, but that the AB's Board of Directors would reject the offer and that InBev would be forced to attempt a hostile takeover. InBev has yet to make that desire public, but we feel this rejection is only round 1 of a long fight.
AB's management indicated it was considering other alternatives to increase shareholders' value through selling non-liquid assets including its theme-park business, Busch Entertainment Corp, which could be sold for more than $2.5 billion and its packaging business, which could be sold for about $1.5 billion. Additionally, management is considering possibly paying a one-time special dividend. While we understand the desire to avoid being taken over, management's actions have the potential to cause more harm than good. In an effort to avoid becoming part of InBev, AB could dig a hole from which it could not climb out. AB has been underperforming for the past few quarters and this seems like a last ditch effort to prove it has what it takes. If AB is to remain independent, we would like to see a concerted push into other markets, even at the risk of losing some market share in the U.S.
InBev's CEO Carlos Brito is saying all the right things to appease management, employees, and shareholders, but as of yet has been unsuccessful in wooing AB. The Oracle of Omaha Warren Buffet has yet to chime in on his feelings regarding the potential takeover, and as the second largest shareholder, with a little more than 5% of the shares outstanding, his opinion matters. Additionally, his decision will also sway many investors' votes in the same direction.
We continue to believe an AB and InBev combination would be good for shareholders and the two companies, but we feel this will be a long drawn out process, likely resulting in one of two options: 1) AB will take enough poison pills to thwart off InBev, but will then see its share price drop precipitously, or 2) InBev will complete the hostile takeover with very little resistance. With all the publicity and apparent outrage surrounding this situation, we think AB will try to hinder the acquisition as much as possible, holding out for a higher price. That will likely come in later rounds though.
The clock is running in round 2 and the companies continue to circle each other waiting for that next punch. At this point, shareholders will have to wager a bet on which company will emerge the heavy weight brewer champion of the world. Ultimately, we believe the belt will go to InBev.