July 14, 2008

Anheuser-Busch Board Bows to InBev, Approves Takeover By Belgian Giant

ST. LOUIS _ The board of directors of Anheuser-Busch Cos. accepted a $52 billion takeover offer from Belgium's InBev on Sunday, putting a quick end to a monthlong standoff between the companies. The agreement paves the way for a brewing colossus controlling about a quarter of the world's beer market.

For St. Louis-based Anheuser-Busch, the sale will end a run of independence that stretches back to before the Civil War. The buyout at $70 a share also represents the biggest, boldest acquisition in the beer industry and one of the largest purchases of a U.S. company by a foreign suitor.

"This changes everything," Morningstar analyst Ann Gilpin said. "An InBev/Anheuser-Busch combination will be a very formidable competitor."

The companies announced the agreement in a joint statement late Sunday evening. They said the combined company will be called Anheuser-Busch InBev, and A-B CEO August A. Busch IV and one other current or former member of the Anheuser-Busch board will serve on the new board.

Both companies' boards unanimously approved the deal.

"We will leverage our collective strengths to create a truly diversified, global company to sustain long-term growth and profitability," Busch said in a statement.

The deal must be approved by both companies' shareholders and is expected to close by the end of the year. InBev said it had "fully committed" financing.

Bent on acquiring the biggest U.S. brewer and its collection of brands, breweries and well-entrenched distributors, InBev sweetened its bid for Anheuser-Busch to $70 a share after offering $65 a share on June 11. By comparison, Anheuser-Busch's average share price for the 12 months before news of the deal surfaced on May 23 was about $50.

The stepped-up price apparently led to negotiations late last week after Anheuser-Busch brushed off InBev's initial offer.

"This is truly one of those win-win situations where everyone should be pleased as punch," said Tom Pirko, president of California consulting firm Bevmark. InBev CEO Carlos "Brito got what he wanted _ took down the big prize. And (Anheuser-Busch) shareholders got a major premium that would have been in doubt for a long time to come."

The agreement followed about a month of resistance from Anheuser-Busch, which blasted the initial proposal of $65 a share _ equal to about $47.5 billion _ as inadequate and not the true value for the company's assets in key markets such as the U.S., China and Mexico.

But the turning point may have been the lukewarm reception that Anheuser-Busch's new strategic plan _ ostensibly a bid to remain independent _ garnered among investors after it was announced on June 27, analysts said. The ho-hum reception may have pushed Anheuser-Busch's board to negotiate, said bond analyst B. Craig Hutson.

InBev argued that the deal was the next progression in a relationship that stretches back 28 years. The companies now cooperate in South Korea, Canada and the U.S., where Anheuser-Busch imports Stella Artois, Beck's and other InBev brews.

The companies' paths have crossed before, under different circumstances.

Back in 1999, Anheuser-Busch had plans to make a bigger splash in Brazil and the broader South American beer market. The company had a minority stake in Antarctica Paulista, Brazil's No. 2 brewer, and hoped to take majority control.

But Brahma, Brazil's biggest beermaker, persuaded authorities to let it merge with Antarctica, creating a new company called AmBev. Anheuser-Busch sold its stake and watched as AmBev proceeded to merge with Belgian brewer Interbrew to become InBev.

Anheuser-Busch, meanwhile, sat out on several chances to make big international acquisitions that could have kept it on top of the global beer industry. Endowed with a conservative management style, it generally elected to test markets by taking partial stakes in foreign brewers.

InBev, in contrast, established a reputation as one of the beer industry's most audacious takeover machines. Executives have coveted Anheuser-Busch's potential for a long time _ perhaps 20 years _ and their ambitions go well beyond short-term earnings potential, said Gilpin.

"They're thinking about the next 100 years," she said.

On Wednesday, Brito told the Post-Dispatch that the proposed deal with Anheuser-Busch was a "natural step."

On Sunday, Brito, who will lead the new company, reiterated his company's main selling point: "Together, Anheuser-Busch and InBev will be able to accomplish much more than each can on its own," he said in a statement.

InBev's buyout of Anheuser-Busch could prove revolutionary. The combined company will churn out about 392 million barrels of beer a year, about 60 percent more than rival SABMiller. Anheuser-Busch InBev will boast sales of about $36.4 billion.

The new company aims to save at least $1.5 billion in costs annually by 2011. About 40 percent of its revenues will come from the U.S., where all of Anheuser-Busch's 12 breweries are to remain open.

Anheuser-Busch InBev also will sell noncore assets, though the assets weren't identified. However, analysts believe that InBev will sell off A-B's theme parks and packaging divisions.

St. Louis will be the North American headquarters of the combined companies. Anheuser-Busch has about 6,000 local employees and a Missouri payroll of about $518 million.

Analysts expect the deal to set off another round of buyouts and takeovers as brewers try to keep up and compete with size never before seen in the beer industry.

The combination will give the new company a platform to build the Budweiser brand outside the U.S. as well as scale to wrest more clout with vendors, Brito said during the interview last week.

"We're going to have more importance to suppliers, developers of technology, raw materials," he said. "There are a lot of things we can do together much better."

But the deal seemed anathema for many supporters of Anheuser-Busch in St. Louis, who feared that InBev would prove a harsh taskmaster and wipe out Anheuser-Busch's habit of charitable donations and generous pay and benefits. Many residents were disinclined to believe Brito's assurances that he harbored no hidden agenda.

Missouri's congressional delegation and St. Louis' mayor made known their opposition to the buyout. Similar hostility popped up as far away as Newark, N.J., where last week a sign hung on a fence near Anheuser-Busch's brewery implored: "Keep Budweiser American."

Anheuser-Busch is "the single most influential presence in American brewing history, period. And that's about to end," said Maureen Ogle, author of "Ambitious Brew: The Story of American Beer." The company "has been making significant decisions since the 1860s," she said. It leads, "and everyone else follows."

In the aftermath of InBev's purchase, A-B's influence will diminish, Ogle said. In the resulting disarray, it will face a struggle with MillerCoors LLC, a joint venture of Miller Brewing Co. and Coors Brewing Co. that took effect July 1.

Indeed, A-B's value will fall, "like driving a new car off the lot," she said.

In any case, the deal could be complicated by Mexican brewer Grupo Modelo, half of which is owned by Anheuser-Busch. Modelo _ the biggest brewer in Mexico and the maker of Corona, Modelo Especial and 10 other brands _ said it has been in active discussions with InBev about how the two companies can work together if Modelo consents to InBev's becoming a minority owner through its acquisition of Anheuser-Busch.

Modelo said its agreement with Anheuser-Busch gives it a "definitive say" in who its partner is. The brewer said it is confident that the agreement gives it the right to decide whether or not to consent to the takeover of Anheuser-Busch by InBev. The company said it was reserving its contractual rights.

InBev itself is making a major bet that it can make the $52 billion investment _ financed with $45 billion in debt _ pay off. The wager is that Budweiser can be turned into an even bigger global brand with a big presence in places such as Argentina, Bolivia and the Ukraine. Plus, the deal will help InBev reduce its reliance on Brazil and other high-growth but somewhat volatile markets.

The U.S. beer market _ of which Anheuser-Busch controlled 51 percent at the end of March _ is growing slowly but still represents the world's biggest pool of profits for brewers.

InBev has built its business largely on relentless cost-cutting coupled with a string of acquisitions. But InBev executives have insisted that the main appeal of buying Anheuser-Busch was the potential increase in revenue. They have been largely silent on the magnitude of cost cuts that Wall Street and Main Street expect to follow.

"This is almost going to be like 'Invasion of the Body Snatchers,' " Pirko said. "The new company is going to be very different. It's going to have a very different culture."

Asked whether he thought Anheuser-Busch's wholesalers were as efficient as they could be _ and whether he would shake up the network of 600 beer wholesalers _ Brito demurred.

"I would change the top line," he said last week.


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