Beer Wars

One of the big stories in the business press this last week has been that the Belgian headquartered beer maker InBev has come out with an offer to buy American beer maker Anheuser-Busch, maker of Budweiser and Michelob. Rumors of this deal have been circulating for several months now, resulting in a rise in Anheuser-Busch’s stock price, which as recently as March was trading for around $45 per share. InBev’s offer is at $65 a share.

The first thing to note is that this deal is almost certainly going to go through. InBev has the financing in place to make an all cash offer. On the day the offer was announced, it was at a price 10% above the closing price of Anheuser-Busch stock the day before the announcement. So the holders of Anheuser-Busch stock (the stock symbol is the cutesy BUD, by the way) collectively have a choice: take $65 a share for their stock, or watch the stock price slide back down into the low $50’s is the deal falls through. Hmmm, $65 or $55. Which one would I take? An old saying that involves wishing in one hand springs to mind right now.

Anheuser-Busch is a family run corporation. The current CEO is August Busch IV, who follows August Busch III. But AB is not a family owned company. The Busch family owns only 4% of the stock. They may have stocked the board of directors with their friends, but if they reject the offer, the board members will have a hard time explaining why they turned down InBev’s offer.

Anheuser-Busch is an acquisition target because of their very success. AB’s market share of the US beer market peaked at 52% a few years back. It has since dropped back to about 50%. If they got any bigger, it would attract attention from the Dept. of Justice Antitrust division. So they have no room to grow in the US market. But what the public stock markets demand above all else is earnings growth. As long as AB was growing, they would have a high stock price. Once growth cooled off, the stock price would sag. The single minded focus on the US market meant that they were slow to grow internationally. Low growth, combined with a lack of globalization, made Anheuser-Busch a target. The weak US dollar makes it a relative bargain.

But not that much of a bargain. Although InBev gets to show earnings growth by folding AB’s earnings in with their current operations, they have to justify paying a premium for Anheuser-Busch to their stockholders. The new owners are unlikely to increase sales, given that they would already control 50% of the market. Brewing is a pretty mature industry, so it’s difficult to see where InBev could squeeze any cost out of manufacturing or distribution. They could save money by cutting back on advertising and brand building in the short run (so long to the Clydesdale commercials at the Superbowl), but longer term that will lead to a loss of market share, and lower earnings.

So aside from increasing InBev’s earnings in the short run, I don’t see any logic for this deal in the long run. This may be why InBev’s stock price has been dropping on the Belgian stock exchange.

If this deal does close, I can predict two consequences: One, a less interesting Superbowl come next February. Two, celebrations by the folks who run Miller, Coors, and Sam Adams.