June 13, 2008 / 7:50 AM / 10 years ago

Higher price for Anheuser not a sure thing

NEW YORK (Reuters) - Anheuser-Busch Cos Inc (BUD.N) may play hard to get in coming weeks as Belgian-Brazilian suitor InBev seeks to woo it with a $46.3 billion (23.8 billion pounds) bid, but few see it being able to spurn the proposal outright.

Analysts say the U.S. brewer’s best option is to persuade InBev to cough up more than the $65 a share now on the table, even if that requires shrewd tactics like threatening to do side deals that would make it a less attractive target.

But finding a real alternative that works for Anheuser shareholders is unlikely given the slow growth of the U.S. beer market, the founding family’s small stake, and the brewer’s weak performance.

“After sufficient bobbing and weaving, saying ‘yes’ will relieve him (Anheuser CEO August Busch IV) of his burden,” said Tom Pirko, president of Bevmark, a Santa Barbara, California-based advisory firm.

He said Busch, who was named to lead Anheuser in 2006 and is struggling to turn it around, will likely concede to InBev, despite prior proclamations to the contrary. InBev is the world’s No. 2 brewer with brands such as Stella Artois and Beck‘s.

Pirko, who said he has worked with Anheuser, guessed that the maker of Budweiser beers will push for $68 or $70 per share. He said it could probably ask as much as $75 per share before InBev would walk away from a deal.

Anheuser, whose shares closed up 5.2 percent on Thursday at $61.40, said it would review the proposal and decide in due course.

An arbitrageur who declined to be named forecast a deal would eventually be done at $70 or more.

“This is standard negotiating practice. You put out a number knowing you will have to go higher,” he said. “InBev has more money in their pockets.”

Sources close to the deal said Anheuser’s best defence was to stress value and it was expected to reject the first bid. However, with no obvious rival bidders, any increase in the bid price might be limited, they added.

Aside from its stock being stagnant for 5 years, Anheuser is vulnerable to a takeover since it lacks a poison pill and must re-elect its board members each year.

Anheuser’s board includes insiders like August Busch IV and his father August Busch III. But there are also outsiders, such as former JPMorgan chairman Douglas Warner and former AT&T leader Edward Whitacre.

The board must now negotiate a better price or quantify how an independent Anheuser can generate equal or higher shareholder value than the InBev bid, Credit Suisse analyst Carlos Laboy wrote in a research note.

The one major way of doing that, Laboy said, was for Anheuser to buy the other half of Modelo GMODELOC.MX, maker of Mexico’s Corona beer, that it does not already own.

The Wall Street Journal reported on Thursday that Anheuser and Modelo were in preliminary merger talks. But Laboy said it seemed too late if shareholder approval is needed for such a deal, indicating that Anheuser shareholders might lean toward InBev’s offer.

Anheuser, whose Bud Light is the world’s top seller, controls nearly half the U.S. beer market. Once the world’s biggest brewer, it has been overtaken by rivals such as InBev and SABMiller Plc SAB.L, which gained scale through international acquisitions.

Anheuser, which derives most of its sales from the U.S., is being hurt by higher commodity costs and slowing sales due to changing consumer tastes.

    Anheuser reported lower profit in its fiscal first quarter, hurt by lower than expected sales and slimmer profits from Modelo.


    Wall Street’s initial bullishness on the bid, which drove Anheuser shares north of $63, lessened with time. The shares even fell below $60 after Thursday’s market close.

    “The market’s first reaction was ‘If they offered $65, they’ll pay $70’,” said Andy Baker, an arbitrage analyst with Jefferies. “But after thinking about it and seeing how weak Anheuser’s protections are, (people realized) there’s not a huge need for InBev to bump its offer significantly.”

    Baker said a $65 per share bid valued Anheuser at around 19 times its 2009 earnings estimates, which he said was higher than the average of its peers.

    The U.S. beer industry “is not a big, growing industry. The earnings are single-digit growth earnings. It’s a good price. It’s the highest the shares have ever been,” Baker added.

    Stephen Jarislowsky, chairman and CEO of shareholder Jarislowsky, Fraser Ltd, shared Baker’s keenness on a $65 bid.

    “It’s a good offer ... If there’s no higher bid, it would look quite attractive for us to accept,” said Jarislowsky, whose firm owned 1.7 million Anheuser shares as of March 31.

    “I doubt that the shareholders would refuse it. And I do not believe that the family have enough shares to stand in the way ... Therefore, the company definitely, with this, is in play,” he added.

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