The saga over InBev’s (INBVF.PK) offer for Anheuser Busch (NYSE: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