Will the king of beers accept its prince?
The stock market may like the idea of InBev's bid for Budweiser, but St Louis locals, and the family that owns the iconic beer, are appalled. By Stephen Foley
Friday 13 June 2008
The mayor of St Louis, Missouri, says "we're not going to go quietly". No less a person than the state's Governor, Matt Blunt, says he is "strongly opposed". On Facebook, for what that might be worth, 18,000 members have signed up to a group aimed at saving Anheuser-Busch, the manufacturer of the American beer icon Budweiser, from the clutches of InBev, the Belgian-Brazilian brewing behemoth that plunked $46.3bn (£23.8bn) on the table this week.
That the notion of the King of Beers, headquartered in St Louis for nigh on a century and a half, falling into foreign hands has caused alarm, there is no doubt. The question is whether this gut reaction will translate into any serious resistance movement. If it doesn't, and soon, then Wall Street is already betting that the historic Anheuser-Busch could be rolled into the world's biggest beer manufacturer within months.
Sensing he could be close to the prize he has coveted since taking over in 2005, InBev's chief executive, Carlos Brito, was yesterday being nice, very nice indeed. The combined company's North American headquarters would be in St Louis, he promised. Senior management of both companies would be retained, and Bud and Anheuser-Busch's other brands would continue to be brewed "in the same breweries, by the same people using the same recipes".
On a conference call with analysts, he said that pushing Budweiser through InBev's strong distribution channels in emerging markets could in fact extend the beer's global hegemony. It would be the combined group's "flagship brand," he said.
There was also a glaring omission from InBev's letter to the Anheuser-Busch board, made public on Wednesday night, and from its conference call presentation yesterday: the cost savings.
The company is not shy about slashing costs, and Mr Brito has got a decent reputation as a manager who forces all his divisions to justify every penny they spend, and who has successfully wrung costs out of all the group's previous mega-mergers. The coyness yesterday has much to do with not frightening the good people of St Louis, and at Anheuser-Busch's other 11 US breweries. (It also has 14 sites in China and one in the UK, from which there was also silence yesterday.)
Few on Wall Street dispute the business rationale for putting these two businesses together. There is little geographical overlap. InBev is itself the creation of a mega-merger, the 2004 combination of Belgium's Interbrew with AmBev of Brazil. It is the giant behind Stella Artois, Boddingtons and Becks, among dozens of beers, but it lacks a presence in the US, where many of its brands are distributed by Anheuser-Busch. For its part, and notwithstanding initially positive notices for its new Bud Light Lime, Anheuser-Busch has had difficulty finding growth in the US, where it already controls 49 per cent of the beer market. It has been slow to push into emerging markets, where increasingly wealthy consumers are trading up to Western brands.
"I think the chances for InBev are looking relatively good," said Wim Hoste, an analyst at KBC Securities in Belgium. "I don't think there will be a counterbid from anyone else, because of the size of the deal. SABMiller would be blocked from taking over Bud by competition concerns because it owns the biggest rival brand, Miller, while Heineken and Carlsberg are too small."
InBev shares soared by some 6 per cent in Brussels yesterday, as the company promised it would fund the acquisition with $40bn of debt and tap shareholders for very little of the money. Previously, there had been speculation of a rights issue. Anheuser-Busch shot up another 5 per cent, and closed within $4 of the $65-per-share value of the InBev offer, reflecting the market's view that a deal is likely to go ahead.
That is causing consternation inside Anheuser-Busch headquarters, where there is little appetite for accepting a takeover. August Busch IV, the great-great-grandson of the company's founder and known internally as The Fourth, told Budweiser distributors that there would be no takeover "on my watch".
He only took over as chief executive at the end of 2006, and has been labouring to dispel the doubts that his father had about whether he was ready to assume the helm of the business. People close to that fractious relationship say the son has not satisfied the father yet, and August Busch III is reportedly even more vehemently opposed to a takeover than his son.
The trouble is the Busch family has little voting power to wield, since they own less than 4 per cent of the shares between them. Outside shareholders years ago also pressured the company to abandon its poison pill takeover protection, which would have allowed it to prevent a hostile bidder from buying more than 20 per cent.
Governor Blunt admitted that, while he would support action to block the takeover, he didn't have any clue what that action might be. Certainly there is nothing to be done at state level. It is hardly a matter of national security that could interest federal authorities. And lawyers said yesterday there is little chance of it being blocked on competition grounds, either.
So what are the possible lines of defence? They actually have to be ones that work for shareholders, which hold out the promise of greater value in the future than the $65 on the table today. Anheuser-Busch said it would respond to InBev "in due course" and insiders said that could take months.
The first plan under consideration in St Louis is the acquisition of the 49.8 per cent of Modelo it doesn't already own. Modelo is the Mexican brewer behind the fast-growing Corona brand, and Anheuser-Busch was reported last night to have already begun talks about taking 100 per cent control. Other options include taking on more debt or selling non-core assets such as theme parks and stakes in small brewers, using the money to pay greater sums back to shareholders through share buybacks.
Michael Branca, an analyst at Lehman Brothers, added that The Fourth has previously hinted there are extra cost-savings to be squeezed from the Anheuser-Busch business as it stands. An existing cost-cutting plan is targeted to reduce overheads by $400m over four years. Mr Branca said that could be doubled.
"As things stand today, we remain in a holding pattern to see how Bud management and board of directors react to the unsolicited proposal," Mr Branca told clients. "We believe any such management proposal will be intensely scrutinised for real value creation potential – especially given the existing $65 bid."
Unless all those intemperate boycott threats on Facebook ignite into some sort of popular movement to scare InBev away, which seems unlikely, the final decision will rest with Anheuser-Busch shareholders, including the billionaire investment guru Warren Buffett, who owns 5 per cent. It is they who must decide whether InBev's bird in the hand is worth two with the Busch family.
A family firm
The 156-year-old Budweiser brewery in St Louis, Missouri, sprawls over 142 acres and 350,000 visitors come every year. The romanesque-style buildings were designated national landmarks decades ago, but around 1,200 people are also employed by Anheuser-Busch at the site, producing 15.8 million barrels a year.
It is a long way from the small brewery that Eberhard Anheuser, a soap and candle maker, acquired in 1860, and its scale is beyond the dreams of his ambitious son-in-law Adolphus Busch, who pushed the business forward and introduced Budweiser in 1876. Its trajectory has only been broken by the unlucky 13 years of prohibition, from 1920, when Anheuser-Busch was forced to diversify into root beer, ginger ale and ice cream. An alcohol-free variant was not a success. The Busch family's dominance continues. Their shareholding has slid below 4 per cent, but descendants of Adolphus have been CEOs except for from 2002 to 2006 – when the current boss, August Busch IV, was deemed ready by his father.
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