UPDATE 4-Anheuser-Busch sets out plan after rejecting InBev

Fri Jun 27, 2008 2:56pm EDT

(Adds details, August Busch quote, analyst, company comments; updates share activity)

By Brad Dorfman and Philip Blenkinsop

CHICAGO/BRUSSELS, June 27 (Reuters) - Anheuser-Busch Cos Inc (BUD.N) on Friday laid out a plan to cut $1 billion in costs and improve earnings as it tries to convince investors that InBev NV's INTB.BR $46.3 billion offer for the largest U.S. brewer was too low.

The program, which the company calls "Blue Ocean" was made even as InBev said on Friday it was mulling what steps to take next after Anheuser-Busch rejected its $65-a-share offer on Thursday.

The plan includes cutting 10 to 15 percent of its salaried workforce through early retirement and attrition, speeding up price hikes to cope with rising commodity costs, and setting earnings forecasts that exceed Wall Street's expectations.

The company also said it planned to repurchase a total of $7 billion in shares this year and next, up from its previous repurchase target of $3.8 billion.

"We believe we can create much more value than the $65 a share over the course of time, and we believe also that the $65 a share significantly undervalues the iconic brands that we have," August Busch IV, president and chief executive, told Reuters in an interview.

He declined to give a specific value for Anheuser's total value, but did say that its new 2009 earnings-per-share forecast of $3.90, multiplied by 18 times -- the stock's multiple before the InBev offer -- suggested a $70 value even before considering the double-digit earnings increases it projects after 2009.

The blueprint does not include selling the company's packaging unit or its SeaWorld and Busch Gardens theme parks -- two businesses that some analysts thought the company might divest in order to focus on its main brewing business.

Anheuser-Busch shares were 1.8 percent higher to $62.48 on Friday afternoon on the New York Stock Exchange but were still below InBev's $65-a-share offer.

A BIRD IN THE HAND?

But some analysts questioned whether Anheuser's plan would do much to boost investors' spirits.

"A bird in the hand is worth two in the bush," said Morningstar analyst Ann Gilpin. "Are you going to take your bet that maybe the stock price can go up and management can deliver, or are you going to take $65 (a share) in cash today?"

Brian Rogers, chairman and chief investment officer of T. Rowe Price Group, questioned whether Anheuser-Busch could generate a plan that would raise its shares to $65 and said he would probably sell the shares at $63 to $64. T. Rowe price owned 17.4 million shares at the end of March and was Anheuser-Busch's fifth-largest shareholder.

"I don't think the company can come up with a plan to get the stock up there and keep it up there," he said. "Even a leveraged recap I can't imagine would get it to $65 and keep it there." Rogers was not commenting specifically on the plan the company announced when he spoke to reporters on the sidelines of Morningstar's annual investment conference.

The maker of Budweiser and Michelob beer wrote to reject InBev's takeover bid on Thursday, but left the door open to a higher bid that would create the world's largest beer maker.

InBev, which makes Beck's and Stella Artois beer, was mulling its next move after filing a lawsuit on Thursday to try to establish that Anheuser-Busch shareholders could remove Anheuser's entire board of directors.

"We will carefully study the letter and will respond in due course," an InBev spokeswoman said.

Anheuser-Busch executives said they would "challenge" InBev's claim that the board could be removed without cause.

PRICE HIKES

Anheuser-Busch forecast earnings in 2008 of $3.13 per share before one-time items, Chief Financial Officer W. Randolph Baker said. The company also forecast 2009 earnings of $3.90 a share, followed by double-digit percentage increases.

Analysts, on average, forecast earnings of $3.02 a share in 2008 and $3.29 in 2009.

The company, which like many food and beverage makers has been hit by soaring commodity costs, said it will raise prices in September and October on about 85 percent of its beers, rather than in 2009 as planned, Baker said.

Between price increases and a shift in sales to higher-priced products, the company expects revenue per barrel to increase 4 percent in both 2008 and 2009, he said.

The company also expects a slight increase in gross margin in 2008 and a larger one in 2009, he said.

The $1 billion in cost savings could be reached by 2010, with the bulk coming by next year, the company said. Aside from job cuts, other steps the company plans include cutting items to reduce supply chain costs and reducing reliance on natural gas and fuel oil.

The company will take an estimated charge of $300 million to $400 million this year for costs associated with early retirement, Busch said.

MORE MONEY?

Anheuser-Busch management said InBev's offer was low on a multiple basis when compared with other recent beer industry deals, like the split up of Scottish & Newcastle by Carlsberg A/S (CARLb.CO) and Heineken NV (HEIN.AS) in April.

Analysts said InBev will not likely give up its bid for Anheuser-Busch and say it can afford to pay more if required -- certainly $70 a share and possibly up to $75.

KBS Securities analyst Wim Hoste said InBev had two options: raise its offer toward $70 per share or go hostile at the existing $65.

"I can imagine they might try through informal contact to see if there is scope to talk about an offer. If not, then they could take the hostile route," he said. "But the friendly approach is clearly better for public opinion and the workforce. The company is a U.S. icon."

Meanwhile, executives declined to comment on its relationship with Mexican brewer Grupo Modelo SAB de CV (GMODELOC.MX).

InBev shares ended Friday trading down 1.9 percent at 44.14 euros, extending their decline from a high of 51.70 euros on June 12, just after it announced its bid for Anheuser. (Additional reporting by Aarthi Sivaraman in New York and Muralikumar Anantharaman and Erin Zureick in Chicago; Editing by Brian Moss and Tim Dobbyn)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.