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— Deals —
 Few unsolicited takeover attempts smooth out as quickly as InBev SA's quest for rival Anheuser-Busch Cos. The brewer of Budweiser wanted to remain independent, but after a monthlong battle, St. Louis-based Anheuser contacted Leuven, Belgium-based InBev to strike a deal, sources close to the process say. A few days later, the companies announced InBev would buy Anheuser for $52 billion, or $70 per share, $5 per share higher than its original offer. The deal got done, these sources say, because it had yet to reach a hostile phase, the rhetoric between the two companies wasn't out of hand and the raised offer was simply too good to pass up.
Adding a level of certainty to the proceedings: InBev had $45 million of financing in place,
so it could pay cash. InBev's offer is a 35% premium to Anheuser's
30-day average share price before speculation about the deal and 18%
over the previous all-time high, reached in October 2002.
Antitrust worries are thought to be slight, with almost no geographic overlap between the two brewers. The deal should close by year's end. The only piece unfinished business is Grupo Modelo SAB de CV, the Mexican maker of Corona and Pacifica beers that is partly owned by Anheuser-Busch, with a 50.2% stake. The brewer's CEO, Carlos Fernández, said July 28 that his company knows InBev's management well and has "been in discussions over the past two weeks about how we could work together" if InBev becomes a part owner. But he also left the door open for an exit, saying that under its agreement with Anheuser, Modelo can decide its own fate. "Our agreement with Anheuser-Busch signed in 1993 was carefully structured to insure we have a definite say in who our partner is," he said. The deal is notable for its size; the ease with which the buyer lined up megafinancing in an ailing credit market; the rise and fall of political opposition to foreign acquisition of an iconic American brand; and, arguably, the rapid humbling of Busch family management by determined foreign acquirers with an austere business model. All good reasons to choose InBev's takeout of Bud as our deal of the quarter.
News of a possible takeover surfaced May 27, when the Belgian daily De Tijd reported that InBev's board was considering a play for Anheuser. The Financial Times also reported that financing for a deal had been provisionally arranged. Analysts said InBev needed to make a big acquisition to cut costs. Weeks earlier, Anheuser president and CEO August Busch IV reportedly told beer distributors that the company would not be taken over "on my watch." But Busch and his father, August Busch III, together own only 1.7% of the 156-year-old brewer, so those words had little weight. The board and management hold roughly a 4.6% stake, and investor Warren Buffett's firm, Berkshire Hathaway Inc., owns 5% of the company. Undeterred by Busch's comments, InBev made an unsolicited offer to buy A-B for $65 per share, or $46.3 billion, on June 11. Anheuser shares opened at $62.70 on June 12. "We believe that the combination of Anheuser-Busch and InBev would be an industry-transforming event," InBev CEO Carlos Brito said in a letter to August Busch IV. InBev had retained lead bankers at Lazard and worked with bankers at J.P. Morgan Chase & Co. and attorneys at Sullivan & Cromwell LLP. InBev also received support from financial institutions Banco Santander Central Hispano SA, Barclays plc, BNP Paribas SA, Deutsche Bank AG, Fortis Bank NV/SA, ING Groep NV, J.P. Morgan and Royal Bank of Scotland Group plc, all of which were reportedly prepared to provide the financing necessary to complete the deal. The two are already U.S. distribution partners for InBev's European brands including Stella Artois, Beck's and Bass. Anheuser and InBev will hold a 69% market share in Brazil, a 21% share in China and a 20% share in Russia. InBev had eclipsed Anheuser-Busch as the world's largest brewer by sales in 2006, two years after the company, then known as Interbrew NV/SA, merged with Brazil's Cia. de Bebidas das Américas, or AmBev, in a complex $11 billion deal. Anheuser was vulnerable: It had not expanded internationally, whereas InBev and London's SABMiller plc had taken that route. "They have kind of been asleep at the wheel in terms of market share, in how to compete," Morningstar Inc. analyst Ann Gilpin said in June. Anheuser did enter emerging markets, such as Mexico, and it owns 27% of China's Tsingtao Brewery Co. Ltd. and 100% of that country's Harbin Brewery Group Ltd. But it hadn't been as forceful as other players in ways that could have made InBev's bid problematic. For example, Anheuser could have made a play for Scottish & Newcastle plc, which would have posed antitrust problems in Russia for InBev, the second-largest player in that market. Instead, the last big British-owned brewer was snared by Denmark's Carlsberg A/S and Heineken NV for $15.3 billion. And Anheuser could have bought a sizable portion of Carlsberg in May, when Carlsberg's controlling foundation diluted its 51.3% stake to about 30.4% to help fund the Scottish & Newcastle bid, by selling its rights to the stock to a group of banks. "To compete against the big brewers, one has to become bigger oneself or become part of something else," Lauren Torres, an analyst at HSBC Securities (USA) Inc. in New York, said after the initial bid was announced. To make matters worse for Anheuser, its stock lagged for five years, making InBev's offer more attractive to shareholders. Shortly after InBev's initial offer was announced, news reports surfaced that Anheuser was trying to woo Modelo into selling the rest of the company. Anheuser-Busch's only option to avoid a takeover offer, the thinking went at the time, would be to buy the remaining 50% it does not own in Modelo, a family-owned operation that has captured about 55% of the Mexican beer market. Analysts estimated the deal could cost about $10 billion, making A-B that much more expensive to InBev. But such a deal would hinge on Modelo's willingness to sell, something it has historically been resistant to do. "Grupo Modelo doesn't want to sell, so I don't think it's an option for Budweiser to buy the rest of [the company]," analyst Laura Herrera of Mexico's Vector Casa de Bolsa SA de CV said in June. There was a political sideshow. Missouri Gov. Matt Blunt called for a Federal Trade Commission review of the InBev deal, pointing to the possibility of a U.S. beer monopoly and its potentially damaging effects on the state's economy. Other lawmakers met with Brito, opposing the deal. On June 20, Modelo's Fernández resigned from the A-B board, fueling rumors that a deal was in the works. But sources close to the deal say Fernandez likely resigned to avoid any conflicts of interest and to focus on Modelo. Others thought he had a falling out with the Busch clan. The situation deteriorated on June 26, when InBev asked the Delaware Court of Chancery to allow the removal of Anheuser's directors without cause. But InBev said publicly it still hoped to strike an amicable deal. That same day, Anheuser rejected InBev's initial offer, calling it "financially inadequate" and not in the best interest of the company's shareholders. One day later, Anheuser outlined a $1 billion cost-cutting plan to appease shareholders and thwart InBev's offer, planning to slash 10% of its work force through attrition and early retirement and by accelerating price hikes for its top brands. The company also said it would repurchase $7 billion in shares this year and next, topping its original goal of $3.8 billion. It did not outline plans to sell its profitable theme parks or packaging business, as some analysts had originally predicted. (With the deal in place, InBev hopes to wring a total of $1.5 billion in cuts. Bud has now suspended the share buyback.) On July 7, InBev pressed on with plans to remove board members at Anheuser-Busch, filing a document with the U.S. Securities and Exchange Commission seeking to oust all 13 members of the target's board. "To date, Anheuser-Busch has been unwilling to engage with InBev in a dialogue to achieve a friendly combination," InBev said at the time. Anheuser urged its shareholders to take no action. The company planned to file a consent revocation statement with the SEC. None of this was enough. On July 14, the companies announced they would merge in a $52 billion deal that will create the world's largest brewer and give a European company ownership of a classic American brand. InBev said the merger should be neutral to the combined entity's earnings in 2009 and accretive in 2010 and that the new company will have more than double the profitability of its largest competitor, SABMiller. "From our perspective, A-B could not propose to A-B shareholders a more attractive offer," Torres wrote in a recent report. Sources say the two companies finally sat down on July 9 to seriously draft the transaction, flanked by an armada of advisers, and that the most challenging part of the deal was that it unfolded in the public arena, with news continuously leaked to the press. "While the process was at times difficult for all parties, in the end the right result occurred for everyone," said August Busch IV in a conference call the day the deal was announced. Brito, meanwhile, confirmed ongoing talks with Modelo. The new entity, Anheuser-Busch InBev, will have a market value of more than $80 billion and control roughly one-fourth of the global beer volume. The deal valued Anheuser at around 12.4 times earnings before interest, taxes, depreciation and amortization.
The merged company will make St. Louis the headquarters for the North American region. InBev agreed that all of Anheuser-Busch's U.S. breweries will remain open. The combined company will generate 40% of its revenue in the U.S. The companies have given no specifics as to who will run the North American operations. "I find it difficult to believe a hard-driving management like InBev's will cede control and let Anheuser run as independently as they seem to have implied, with St. Louis being the headquarters of the brand," says Standard & Poor's analyst Esther Kwon. Brito will lead the new board, which will include directors at InBev, August Busch IV and one other current or former director from the target's board. Shareholders of both companies will vote on the deal at meetings to be scheduled later. InBev's controlling shareholder group, which owns about 53%, has agreed to vote in favor of the transaction. Buffett also backs the deal. The InBev-Anheuser merger may pressure other rivals, like SABMiller, to do deals. With $21 billion in annual sales, the U.K. brewer will fall to the No. 2 spot; the new A-B-InBev will have annual sales of $36 billion. SABMiller could try to buy Denver-based Molson Coors Brewing Co. They merged their U.S. and Puerto Rican units, creating a giant with $6.6 billion in annual sales. Molson brands include Coors Light and Molson Canadian. "U.S. companies are attractive targets now for overseas companies, based on the dollar," says Mike Egan, a partner at law firm King & Spalding LLP. SABMiller could also look to snag Dutch brewer Heineken, which may be vulnerable after its joint purchase of Scottish & Newcastle earlier this year. Or it could try to buy Mexican brewer Fomento Económico Mexicano SAB de CV, known as Femsa, the maker of Dos Equis, Sol and Tecate beers. Torres has said Modelo could try to stop its shares from being transferred to InBev, sending the case to arbitration. It could then try to buy back its half from the new company and become independent. With a strong cash position and a 2008 estimated Ebitda of $2.2 billion, "Modelo appears to have the capacity to buy back the 50% stake Anheuser-Busch holds, and the ability to negotiate attractive terms," Jonathan Feeney, a senior analyst at Wachovia Capital Markets LLC, wrote in a July 17 research note. Modelo could also make a deal with another buyer, such as SABMiller, which could provide money to help it escape Anheuser-Busch-InBev. It also might do none of that. "We think the most likely scenario is that InBev keeps the stake in Modelo for now," wrote Morgan Stanley analyst Alexandra Oldroyd in a July 15 research note. Depending on which company Modelo chooses, the Anheuser-Busch-InBev deal could become even more interesting.
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