Can A-B Resist InBev?

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Brew blog

May need Modelo’s cooperation, says Wall Street Journal.

Can Anheuser-Busch resist InBev’s unsolicited $65 per share bid?

Unlikely without help from Grupo Modelo, the brewer of Corona Extra, in which A-B has a stake, says a Wall Street Journal story.

From the story:

As one Anheuser shareholder put it Thursday, InBev “could drive a Mack truck” through the U.S. brewer’s defenses.

The Wall Street Journal reported yesterday that A-B was in talks with Grupo Modelo — in which A-B owns a 50 percent stake — about a possible combination.

But observers say such a deal would be difficult to pull off and Modelo isn’t necessarily amenable to any sort of combination.

Two analysts say that A-B may be seeking to drive up the price.

Morgan Stanley analyst William Pecoriello says in a note:

The two conclusions that we walk away with in the first 24 hours since Inbev’s buyout offer to Anheuser-Busch are (1) BUD will not go quietly and if the reported Modelo talks fail, we see BUD looking to other defenses before agreeing to a buyout and (2) if BUD ultimately agrees to a buyout, we believe it will look for a higher price – at least $70 / share. On A-B’s method of calculating EBITDA (adding back the pre-tax equity income), and the method we would presume that BUD would use to evaluate an offer, Inbev is offering roughly 11.4x trailing EBITDA, below the 11.9x Heineken recently paid for mature assets in Europe. A similar multiple would imply a takeout price of $70.

He adds:

Before accepting a bid from Inbev and assuming that a Modelo combination does not come to fruition (rejected by controlling families), we believe that A-B is likely to exhaust its options to defend itself. Alternative options that A-B might consider would be a combination with another non-alcohol or alcohol company and/or its own aggressive restructuring and non-core asset disposals.

Writes Credit Suisse’s Carlos Laboy:

Not surprisingly, A-B is reported to have entered negotiations with Grupo Modelo in what we indicated would likely be an attempt to increase the standing bid from $65 per share toward a slightly higher bid in the $70 range. … In sum, A-B would seem to be leveraging its Grupo Modelo stake to drive a higher share price. But we think InBev has enough structural options and balance sheet depth to deal with a variety of Bud-Modelo scenarios.

The Wall Street Journal story noted a range of challenges A-B faces in trying to hold off InBev. It has neither a staggered board nor a poison pill provision. But another potential challenge comes from A-B’s shareholders. From the story:

The biggest obstacle Anheuser’s board may face in trying to escape InBev’s clutches are its own shareholders. A large percentage of Anheuser’s shares are now held by hedge funds and activist investors who moved in after rumors of a deal surfaced. These holders are keen to make a quick return on their investment and will likely turn a deaf ear to any claims by Anheuser’s board and management that independence will create more value in the long term.

Indeed, one A-B shareholder quoted by the Journal predicted that the deal will get done – even if A-B doesn’t like it. From the story:

Anheuser’s board might be wise to reject InBev’s offer as a way to draw a higher offer, but ultimately the Belgian-Brazilian brewer has made an offer that is going to be difficult for Anheuser to ignore, analysts say.

“It will be a big fight, but the deal will get done,” said one Anheuser shareholder. “The price is fair and the [Anheuser] board is vulnerable.”

Time will tell.

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