Analyst: Budweiser-InBev Merger Must Move Fast
May 20, 2008
An Anheuser-Busch merger with Belgium brewer InBev, rumored throughout all of last year, may be more difficult to close once the Bush administration, with a reputation for lenience in foreign investment, leaves office in January 2009, argues an analyst with New York broker-dealer Louis Capital Markets.
Talks were reportedly heating up between the two brewing giants in February 2007. While nothing definitive has emerged since then, and Anheuser-Busch chief executive August Busch has been adamant in his opposition to a sale, analyst Robbert Van Batenburg speculates merger talks have renewed.
He says a deal has to happen quickly due to a number of converging factors besides growing political concern over foreign investments, citing the weak U.S. dollar, and Budweiser's exposure to rising commodity prices due to the beer's unique brewing recipe.
"If InBev acquires Budweiser in the next few weeks, a Hart Scott Rodino Antitrust period of 30 days or 60 days including extensions and/or a Department of Justice 90-day review period would expire well before Bush leaves office," Van Batenburg wrote in a research note.
Van Batenburg said hardly any major deals over the past seven years were rejected on the grounds of excessive market concentration, citing the Maytag-Whirpool and the SBC-AT&T mergers as prime examples. He also cited a report Tuesday from Canadian newspaper The Globe and Mail that publicized a letter Democratic frontrunner Barack Obama wrote to the mayor of a suburban Chicago town opposing Canadian Railway's $300 million play for Elgin Joliet & Eastern Railway, which currently awaits federal approval — a sign he said that indicates a presumptive Obama administration might hold a tighter rein on antitrust issues.
Van Batenburg expects InBev, whose flagship brands include Becks, Stella Artois and Brahma, could acquire Anheuser-Busch at $67 a share, representing a 30% premium. InBev would particularly benefit from the high valuation of the euro to the dollar — he notes InBev's market cap is $10 billion higher than that of Budweiser.
A deal would benefit both companies, Van Batenburg adds, since InBev has a relatively small share of the U.S. market which Budweiser dominates and is strong in overseas markets where Anheuser-Busch is weak.
The two companies already have distribution agreements, allowing each "to look into each other's kitchen, so to speak," Van Batenburg said. InBev has used Anheuser-Busch U.S. distribution system for their products since 2006. A combination would allow InBev to perhaps take more control over the distribution network in the U.S. and utilize it more effectively. Anheuser-Busch meanwhile uses InBev's distribution system in Canada, where InBev owns Labatt, which along with Molson, dominates the Canadian market.
One of the reasons Anheuser-Busch may be so vocal about opposing a merger is to avoid upsetting their distributors. Van Batenburg said, for this reason, such a deal may be billed as a merger of equals.
"The power of Budweiser in the distributor network," Van Batenburg said. "On the other hand, Budweiser doesn’t really seem to be able to get a sizable market share outside the U.S. They're only good at buying into existing operations, not good at penetrating."
Additionally, a deal would help offset any cost increases Anheuser-Busch faces because of its use of rice in their beer recipe — Anheuser-Busch is in fact the largest rice buyer in the U.S., covering 6% to 10% of the annual rice crop, Van Batenburg wrote.
However, a combination would give Anheuser-Busch/InBev and Miller-Coors 80% market share in the U.S., which would likely raise the hackles of the Department of Justice. "This would make the approval process anything but smooth, even under the current administration," he wrote.
Anheuser-Busch also faces a loss of market share once the Miller-Coors combination ramps up, Van Batenburg said, and any bump from its launch of a new Bud Lime product will likely wear off, dampening Anheuser-Busch's M&A appeal.
"As Budweiser's domestic market position erodes, without a strong international exposure, it becomes a less appealing takeover candidate," Van Batenburg wrote. "This underscores the appeal for Budweiser shareholders to merge with strong a international beer maker in the near term."
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