Anheuser Busch: The First Round Is On Bud Shareholders

The saga over InBev’s (INBVF.PK) offer for Anheuser Busch (BUD) is finally quieting down, and it appears that all it took was more money. We were taken by surprise by the rapid succession of negotiations between the two brewing giants, as companies of this size rarely move at this speed. It was on June 26 that BUD officially rejected InBev’s offer of $65 per share, claiming that it undervalued the company. August Busch IV, the company’s recently installed CEO was not ready to give up control of the company that his family started 156 years ago. He felt that BUD should remain independent and through his leadership the company could turn around its uninspiring stock performance over the last few years. It is clear to us that the new $70 per share offer is more than a fair valuation and in this economy shareholders and board members alike would be foolish to reject it.

InBev’s reasons for wanting to acquire BUD are obvious; the Belgian/ Brazilian brewer has strong brands in nearly every beer drinking corner of the world except the United States. Budweiser, with its 132-year history—“The Great American Lager”— is one of the most recognized brands in the world. However, it is such an American icon and business institution that the takeover bid became increasingly political in nature, prompting even Barack Obama to comment that a foreign ownership of Anheuser Busch would be a “shame”.

While culturally this is a sad day for many in St. Louis and around the country, financially the deal makes sense. We would be stunned if the deal does not go through. The alternative for InBev was to continue its pursuit of a hostile bid, which may have eventually won out, but would most certainly have taken much more time and engendered even more opposition from BUD loyalists.

We look at stocks from a value perspective, and from our view BUD would simply be overvaluing itself if it were to reject the $70 per share offer. The stock was up 9% Friday after the new offer price was leaked. Prior to the talks with InBev, BUD stock had languished between $45 and $53 for years and the $70 price tag represents a 32% premium over the high end of that range. We have been positive on BUD from a value perspective for some time but even this price is more than fair. When we insert the $70 price into our valuation metrics, it puts BUD just slightly in overvalued territory. For example, historically BUD has traded between 11.54 and 14.34 times cash flow, given current cash flow and the $70 price, that metric pushes to 15.12. It is a similar story with price to sales as well. So, as we stated earlier, we are sympathetic to the blow to national pride of a foreign-owned Budweiser, but it is not pride that pays the bills, its money.

Ockham Research Staff @ July 11, 2008

Comments

[Grant Simpson]

It is a shame that the only metric of interest is stock price and short term return. Don't take into account that BUD has good employee benefits that must be "adjusted" to reflect the industry norms, ignore all the community good BUD does, even outside St. Louis, because none of that adds to the bottom line (at least not as far as the short sighted Wall Street folks can deduce) and most importantly ignore the fact that the only reason this transaction makes sense at all is because of the horrible deflation that has occurred to our currency in the last couple of years. Now instead we can look forward to a company that will have to slash and burn to pay off their enormous debt. Assets like the theme parks and Grant's farm will need to be sold. Of course the new owners of Sea World and Busch Gardens will have to stop their wildlife funds etc. because they will have to pay off the debts that their new owners incur when they borrow money to buy the theme parks from BUD who must sell them to pay of the money they borrowed to by BUD, a company that didn't want to be bought that had almost no debt. Domestic farmers will lose a very big customer for rice and barley because InBev will want to help their various home land farmers, namely those in Brazil and Europe, because they will want to "harmonize" their supply chain and "maximize" their supplier clout. Of course Bud (the beer, not the company) does have a couple of extra steps, those will have to be cut out because we must all pray at the alter of maximum return, besides as has been said many times Bud is a watered down beer that shouldn't be around anyway. Of course InBev has said they aren't planning on doing any of these things (never mind their historical record of doing all of these things with their previous purchases) and we should take them at their word that this one time they won't, and besides once they are given control of the company there is no mechanism to even encourage, let alone force, them to live up to their word.

I for one am sick of the Warren Buffets and Carl Ichans of the world forcing our country to sell off assets just so they can enhance their fortunes some more. Warren Buffet has said many times this year that he intends on doing his investing in Europe so now he will have some more money to invest in those other countries.

Perhaps its time to look past the business is business model that lives in a complete vacuum removed from cause and effect. Perhaps we shouldn't be expected to sell our own mother if someone offers a decent price.

[Atlanta Condos Advisor]

I do not believe they will close grants farm Busch Gardens because of the sale.

[User 225407]

To the first commenter:

Debt financing is not a terrible burden. If you look at the Modigiliani-Miller theorem en.wikipedia.org/wiki/..., you'll find that the effect of leverage is not nearly as big an issue as it seems.

Operationally the firm won't change much, simply because foreigners own it. The theme parks are still profitable (or not - I don't know), and new owners will continue to operate them as long as they have a positive net present value. If they don't, they should have been closed anyway.

Even the brand "Budweiser" probably won't change, because that brand has a tremendous amount of value associated with it. You'll still see the hillarious Bud-Light commercials, etc. New ownership won't really change anything, as the goal of the firm has been, and always will be, to make money. Because of national emotions, we may even see the name "Anheuser-Busch&q... continue to exist "Anheuser-Bush, St. Louis MO, a subsidiary of InBev Co." or something to the effect.

Buffet/Ichan are completely unrelated to this issue, but:

I understand that you are upset with successful people. You must still understand that they add value to the economy. When any investor buys securities, s/he allocates capital to the firms that s/he thinks are most likely to perform. This encourages firms to perform well, streamline operations, and generally become more efficient. You mention that "short term return" is a "shame". Yet Buffett/Ichan are far from short-term traders. These men are true owners of their firms, and treat them as their children.

Lastly, America is not selling Anheuser-Busch, its shareholders are. In no way do the citizens of the United States have any say in the matter. If they don't view Anheuser-Busch as their "mother" then it's not a problem. If they did, then they probably wouldn't sell it.

Businesses ARE businesses, nothing more, nothing less. Emotional investing will not result in the best gains for the economy. Coincidentally in the current poor economic times, the economy has become the #1 issue in the upcoming presidential election according to this poll edition.cnn.com/ELECTI.../. Thus, we should be doing everything we can to improve it.

So no, it's not time.

[BigGuy]

Family run firms that get beyond the third generation are consistently better managed and have better long run stock performance. Figuring in how well Bud is managed now and what management could do now to get the stock price up, without being acquired, $70 a share is still too low a bid.

There have been many studies through the years attesting to the strength of family management. Here's a news article referencing a few: a 2006 IHT article about family firm's outperformance:
www.iht.com/articles/2... /mfamily.php?page=3

The Hilton and Wrigley families have sold out at top dollar. The Bancrofts were stewards of Dow Jones for many years, not managers. The Busch's are more like the Hilton's and Wrigley's -- they've been good managers.

BUD's two major assets are not on the balance sheet and are not figured into the stock price. One, their distribution system is just about the best of any legally controlled and monitored product -- alcohol, tobacco, firearms, or prescription drugs. Two, the goodwill maintained by the firm is primarily a gift of the Busch family, which substantially undervalues itself (no matter the size of Busch family egos). Economists value such goodwill as 10 to 25% of a firm's capitalization; follow up from the IHT article to find academic studies backing that assertion.

[Antti]

To User 225407:

I think your corrections about Buffet and Ichan were to the point, but I disagree with you on two things:

1) I looked at the Modigiliani-Miller theorem and it was terrible thing to read. Two theorist professors "with no experience in finance" and probably with no real life experience either make a theorem with pen and paper. Leverage is the major reason for the economical turmoil we are experiencing today. In real life there are bad times in economy and highly leveraged companies get into trouble. Companies with no debt and lots of cash have a better ability to buy those troubled companies. I have seen this happen many times. Buffet favors companies with little or no debt and I understand why. Buffet has real life experience contrary to these professors.

2) I think the first commenter had a point in favoring family-owned companies. Family owned companies are being lead with focus on long term benefit of the company and therefore also the long term benefit of employees and of the society in general. On the contrary, institutional owners don't care about anything else but a relatively short term gain in the price of the common stock. That is why they give stock options to the management. Motivated by the options the management does what ever it takes to please the stock market. Unfortunately this means all the fashionable things like repurchasing own stock by huge amounts, rising leverage to dangerous levels, capitalizing every possible cost to balance sheet and writing beautiful income statements. The sad thing is that those acts have serious real life consequences. That kind of irresponsibility makes me feel sick.

[Hieronymus]

this should be perfectly simple: if there is more value in the enterprise above the current $70 offer then let the bidding begin. Forget about theoretical values associated with 4th generation family owned businesses, let the real smart $ bid. Where is the employee pension and 401k money? the owners taking it private? It won't happen because when you put your own $ on the line, squishy metrics and sentimentality will not carry the day. No one likes when the world changes but it always has and always will. Sorry St. Louis.

[Fratehauler]

Well , Well InBev.... at $70.00 per share...... "This BUD is yours"

[ExBudGuy]

It was Pat Stokes stewardship that put the company where it is today. Over the past 15 years the III & IV have treated the company like it was their God given right to lead it, when in fact Stokes was leading it. Now that the IVth has put his buddies in decision making positions, we see the true Busch leadership.

[r53]

Something about this newest development with Inbev just doesn't make sense to me. According to Financial Times, A/B had the full acquisition of Grupo Modelo sown up and ready for the signing, and this was just before July 4th, in fact they state that A/B was seriously considering making the formal announcement right after the holiday weekend. (I know from a very,very reliable corporate source, that the board WAS meeting on the 5th and 6th. Source didn't know specifics but said they were sure some kind of announcement was to be made the 7th or 8th) Then just 5 days later the August IV is sitting down with Brito in New York???? It doesn't fit, they've got Modelo in hand, which will knock the crap out of Inbev's bid, and THEN decide to sit down with Inbev and deal for an extra 3-4bn??
No something is not right! Don't turn out the lights on this one yet, I don't think it's over. If it IS over and A/B accepts the Inbev offer then I would think A/B has some explaining to do about the Modelo deal.To some very loyal shareholders, who voiced objection to this deal at any price, and to their employees, as well as the people of St. Louis and all over this country who backed them in rejecting Inbev in the first place. Hell they could have lawsuits filed for taking the deal in light of this!
Sorry just trying to get this straight in my head, hope it made some sense.




I agree with ExBudGuy, most people don't get this, the III was on his way out, finally retired in 2002, Stokes babysat the company from 2002 to mid 2007? Finally the IV gets the nod in 2007 and has only been in the position for a year. But He's got some great ideas.

[User 225407]

To Antti:

On Your First Paragraph:

The Modigliani-Miller theorem is one of the foundations of any finance class at any respected american university. It was invented at MIT's Sloan School of Managment, and is taught at other top business schools such as Wharton, Stern, and Harvard. It won it's authors a Nobel Prize in economics.

You are complaining that leverage makes financial distress worse, as highly-leveraged firms struggle to pay off creditors. That is true, and the theorem accomodates that. However, it is irrelevant to Anheuser-Busch. The financial distress in today's economy is primarily coming from the Financial and Airline sectors, not beer.

On Your Second Paragraph:
That's great, but Anheuser-Busch is already a publicy traded company, so the family-owned issue is irrelevant.

[Antti]

To User 225407:

You are right, higher leverage is OK in beer industry if the company has as strong brands as BUD has. It will make consistent and high enough margin to cover the financial costs anyway. I was actually considering BUD worth 41 dollars per share regardless of debt.

My generalizations were partly of-topic as we are discussing BUD. I'm sorry for my bad attitude, too. I was stressed after analyzing stocks for 19 days in a row. You have great arguments.

BTW, my analysis gives up to 7 % return of investment for the 70 dollars bid. It is not that bad for InBev especially if dollar gets stronger in the long run.

[truthinvesting]

if the Busch family was serious about keeping that they would have KEPT and not sold their options