InBev's $65/share Offer for Anheuser-Busch Looks Cheap

Jul.11.08 | About: Anheuser-Busch Inbev (AHBIF)

With InBev (INBVF.PK) declining to raise their US$65 a share offer for Anheuser Busch (NYSE:BUD) we decided to have a look at some projected financial numbers for BUD as a standalone entity using our on-line valuation tool. How does US$65 a share stack for BUD?

BUD Valuation

BUD grew revenues from US$14.9 billion in 2004 to US$16.7 billion in 2007 – a 3.7% compound annual growth rate. Our assumptions of revenues for the next three years are US$17.5 billion in 2008 growing to US$19.0 billion in 2010 – a 4.4% compound annual growth rate. We have projected EBITDA margins to be flat at 24%. We have used a terminal growth rate of 3%. We used a terminal capital expenditure number of US$900 million. We have also used a WACC (discount rate) of 7.5%.

Valuecruncher Valuation BUD

Our analysis incorporates the cash and debt on the BUD balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$67.65 which is 8.9% above the current share price of US$61.30. Our valuation is also 4.1% above the InBev offer. This is a standalone valuation for BUD. If InBev want to get this transaction completed there are a lot of obstacles but price looks the key one.

The WACC (discount rate) and terminal growth are the key assumptions with our numbers. If the WACC (discount rate) is decreased to 7.0%, keeping all other assumptions constant, that increases our valuation from US$67.65 to US$76.77. A WACC (discount rate) of 7-8% is our estimate of a “reasonable” WACC (discount rate) for BUD. Dropping the terminal growth from 3.0% to 2.5% decreases our valuation from US$67.65 to US$60.67. A terminal growth rate in the 2.5-3.0% range is our estimate of a “reasonable” terminal growth rate for BUD.

Based on our analysis the current offer looks undervalued. Play with our assumptions – what does your analysis say?

Disclosure: None