Posted by: Ben Steverman on May 23, 2008
Could an American icon be gulped down like an ice-cold lager on a warm summer day? The news Friday is that InBev (INTB), the huge Belgian beer company, may be making a $46 billion bid for Anheuser-Busch (BUD), the U.S.’s largest brewer. FT Alphaville reports the deal is still in the planning stages; InBev hasn’t yet approached Anheuser’s board and its chief executive August Busch IV, but may offer $65 per share, a 23% premium over Thursday’s closing price. (Anheuser wouldn’t comment on the reports.)
I have a few thoughts on the deal: First, this a sign of the changing times in the beer business. Second, don’t get too excited: This might not happen. Third, the fact that a $46 billion deal is being contemplated at all by InBev is a good omen for investors and financial markets.
1. Changing times.
This deal has been rumored for quite a while, however the rumors used to have Anheuser-Busch buying its European rival, not the other way around. Consolidation has been a running trend in the beer industry for years. Companies like SAB Miller and InBev (the combination of Interbrew and AmBev) have used acquisitions to share distribution, get access to fast-growing foreign markets and buy up hot new brands.
Beer sales in the U.S. have been stagnant, and that’s hurt Anheuser-Busch, with its strong domestic focus. Sales of its core brands dropped 1.4% in the first quarter. American consumers are shifting from traditional mass-produced beer toward so-called craft beers or microbrews. Also, they’re drinking less beer and more wine and premium spirits.
Now, InBev is larger than Anheuser and in a position to do what Anheuser couldn’t do. By buying the St. Louis-based brewery, InBev would make break it out of its domestic trap, placing it as part of a broader, global company.
2. It might not happen.
Bud shares were up 7% at midday on Friday, to just above 56. That’s a good bounce, but the stock is far from the 65 bid that InBev is reportedly planning. That’s a sign that investors definitely don’t think this deal is a sure thing.
Yes, the deal makes some sense when it comes to geography and product mix; Anheuser already distributes InBev’s brands, which include Stella Artois and Beck’s, in the U.S.
But FT Alphaville says InBev is expecting reluctance from the CEO, Busch, whose family started the company 148 years ago.
Gimme Credit analyst B. Craig Hutson suspects Bud management might not be willing to cede control of the business. “There are too many impediments to a deal,” he wrote after reports surfaced Friday. The transaction size is very large, making it difficult to accomplish, he says. And the cultures of the two firms are “vastly different.”
3. Investors can celebrate this deal.
The mergers-and-acquisition provided a boost to the stock market through much of 2007, but the credit crunch killed many potential M&A deals. Buyers couldn’t get financing. As I wrote recently, companies with strong balance sheets are finding credit markets loosen up a bit, while private equity firms remain sidelined. That and the recent drop in stock valuations give an advantage for corporate buyers to pick up bargains without a lot of competition. Will they seize the opportunity? InBev obviously is.
A wave of foreign acquirers of U.S. companies might unnerve some Americans, but it would undoubtedly lift stock prices.
FT Alphaville says InBev has obtained a $50 billion financing package already from JP Morgan (JPM) and Santander (SBP). That much capital is another sign the credit markets are loosening, although the cash-generating and recession-resistant beer business is a relatively good bet for creditors.
When I was investigating the M&A environment recently, some were surprised that more foreign buyers weren’t taking advantage of the weak dollar. The recent decline in the U.S. dollar, especially against the euro, prices many U.S. assets attractively in foreign currency. However, Howard Lanser, an investment banker at R.W. Baird said he was surprised to see little crossborder M&A activity. “Even though the dollar is weak, there are still lingering concerns about the U.S. economy in general.”
This $46 billion deal, if it happens, is a vote of confidence in the U.S. economy, a good sign of the health of the credit markets, and yet more evidence that the M&A market is waking up from the dead.
(Thanks to BW colleague Adrienne Carter for her insights on the beer industry.)