The Unsolicited InBev Bid For Anheuser-Busch

Last week, InBev offered $65 / share to acquire Anheuser-Busch. The combination would make the largest beer company by sales revenue in the world. Anheuser-Busch used to hold the title, until Interbrew of Belgium merged with AmBev of Brazil, creating InBev. And then South African Breweries' acquisition of Miller Brewing and other companies dethroned InBev and currently holds the spot. InBev is primarily interested in Anheuser-Busch to gain a foothold in the US market (AB keeps about a 50-share compared to InBev's 2%), but also to add the "iconic" Budweiser brand to its world market-penetrating portfolio.

Before the offer went public, Anheuser-Busch CEO (and fifth-generation family member at the helm) August Busch IV was quoted as saying that the company "won't be sold on my watch." Being from St. Louis and having worked for Anheuser-Busch for two years, I knew he wouldn't be the only one staunchly opposed to the sale. There is a mentality ingrained in the company culture and the city of St. Louis - a strong culture that I never really fit into. Recent news of regional politicians taking preventive actions against a sale also validates the widespread opinion that Budweiser, the world's best-selling beer, should remain American-owned in St. Louis, MO. Missouri governor Matt Blunt has asked the Federal Trade Commission to review the potential deal for potential anti-trust issues - a desperate and futile move given InBev's 2% market share. Similarly, Republican Congressman Kit Bond and Democrat Senator Claire McCaskill have lobbied the Department of Justice in an attempt to block the deal. Several websites have sprung up with names like "www.savebudweiser.com" and "www.saveab.com" to rally support for the company staying in St. Louis. Who do they plan to petition, I don't know. I had heard hints from St. Louis that "The Fourth" had a nuclear option up his sleeve to thwart a deal. Given that the family owns a tiny minority of shares which do not have super-voting privileges, and given the board of directors is up for election in any given year, what could that nuclear option be? It turned out the nuclear option was to buy the remaining 50% of Mexico City's Grupo Modelo (brewer of Corona) that AB does not already own. Such an acquisition would raise AB's price tag $10 billion or so, which would be difficult for InBev to secure financing for in today's tight credit market. The Mexican families which control Modelo have about as good of a relationship with the Busch family as does the InBev management, so a deal isn't likely.

Unfortunately for Anheuser-Busch upper-management, protectionist politicians, and sentimental consumers, $65 / share is a price difficult to refuse. Due to consumer preferences shifting away from macrobrews toward craft brews and imports, spirits, and wine, AB has seen sluggish growth at best. AB's stock price has hovered around $50 for almost a decade. The main reason $65 is difficult to refuse is that there doesn't seem to be an exciting new strategy for growing the business. The most impactful new product of the last five years was Bud Select, a cannibalizing brand which I can't discern in taste from Bud Light. AB secured distribution rights for Monster energy drinks and, ironically, InBev beers in the US - both moves are hardly on the scale needed to significantly boost growth for the nation's leading brewer in an increasingly competitive global marketplace. AB briefly flirted with Brazil in the nineties, only to pull out and never return. AB does own 27% in China's #2 brewer, but margins in China are razor-thin and that asset won't bear significant financial results for a long time. On the other hand, InBev out-maneuvered Anheuser-Busch by dominating Latin America while consolidating a significant chunk of Europe. Soaring food prices (rice, corn, barley and hops) and a weak US dollar combined to create a perfect storm in which InBev is in the position to acquire AB outright, as opposed to the two companies' merger talks of yester-years.

The only rational reason the deal wouldn't happen lies in the cultural differences between the companies. InBev is known as a hyper-effective cost-cutter. They have closed centuries-old breweries in Europe and become a super-efficient holding company that just happens to sell beer. InBev management has been rumored to believe there is a potential $1.4 billion to cut from Anheuser-Busch operations. To the contrary, Anheuser-Busch is a benevolent employer known for generous employee compensation and spending top dollar on marketing initiatives - a contributing factor to its powerful brands. Brand management is Anheuser-Busch's business, core competence and passion. In my first year of employment in Contemporary Marketing, I had a $300 / week expense account for the bars. After a few months, I learned the $300 was more of a minimum than a maximum. One week I spent $1500 and didn't even receive a phone call about it. And every St. Louisan has heard the stories of AB employment perks including free beer, first-class flights, generous pay, tickets to various entertainment, etc. InBev would certainly find cuts, but would these two cultures blend? A private-equity-firm-esque, holding-company mentality and a tradition-rich, patriotic, proud character? The inevitable culture clash presents the only rational reason the two shouldn't join.

It has been reported this week that the world's richest man Warren Buffet, whose Berkshire Hathaway is AB's second-largest shareholder owning 5% of the company, supports a deal. Other large shareholders - the majority of which do not live in the St. Louis area - have been reported to support a deal as well. Aside from political reasons, there is no compelling financial or strategic reason for the deal to not happen. Anheuser-Busch has been almost exclusively focused on US market share in an age of globalization. In my time with the company, every strategic move seemed to be aimed at Miller, Coors, or boosting sales in the mature US market. Meanwhile, I can't order a Budweiser anywhere in South America. (However, I should be able to as soon as Budweiser is in the InBev portfolio.) Without considering how much imaginary value lies in the temporary economic worries of protectionist Americans or sentimentality for an "American company" (regardless how competitive it would not be in the future), the best value for the Anheuser-Busch shareholders and the best opportunity for the Budweiser brand lies in the deal with InBev.

Insightful article by a St. Louis native and financial analyst in favor of a deal:
Sobering Thought: Anheuser-Busch sale makes sense (by David Weidner)