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Rumors about Belgian brewer InBev making a run at Anheuser-Busch have been doing the rounds since early last year. The rumors became real on June 11, 2008 when InBev officially launched an unsolicited $46.3 billion or $65 per share bid for Anheuser. But the U.S. beer icon has rejected the buyout bid saying the offer is financially inadequate and not in the best interests of Anheuser-Busch shareholders. However, some analysts believe that though Anheuser has been resisting the bear hug, it has not entirely closed the door to the possibility.
Beer Sector: Some hot facts and cold truths
The alcoholic beverage industry includes three sectors - Beer, Spirits and Wine.
The U.S. beer market, valued at about $97 billion, is the second largest in the world by volume, next to China. Beer tops the list of alcoholic beverages in the U.S. with a 57% market share. Due to increased competition from wine, driven by a shift in consumer preference, the beer industry had been losing nearly 1% share of alcohol beverage servings per year since 2003, according to market research company Information Resources Inc.
However, the beer industry is starting to show signs of a turnaround. According to the Handbook Advance published by the Beverage Information Group, beer sales in the U.S. in 2007 were up for the second straight year to 2.93 billion cases, representing a 1.2% growth. Wine sales for 2007 rose 4% to 294.4 million cases, marking the 14th consecutive year of growth, while sales of spirit grew for the tenth year, reaching 182.4 million cases, reflecting a 3.2% increase.
The Beer Institute estimates that beer sales by volume in the U.S. will grow 1.9% in 2008. The "craft segment"* of the beer industry is riding high as demand for craft beer has been steadily increasing. Craft brews, which notched up $5.7 billion in sales last year, account for nearly 6% of beer sales in the United States, according to the Brewers Association. (*Craft segment includes small traditional and independent breweries).
Big-ticket Mergers: A look back
The beer industry is an oligopoly form of market dominated by a limited number of players, which wield control over the price. The big firms have been expanding their market share by introducing new brands and snapping up domestic and international competitors.
Hoping to take on the then market leader Anheuser Busch, London-based SAB in 2002, acquired North American brewer Miller Brewing from the Philip Morris group for $5.6 billion to form SABMiller (SAB.L | Quote | Chart | News | PowerRating). The combined company's brands include international beers Pilsner Urquell, Peroni Nastro Azzurro and Miller Genuine Draft and a range of local brands. For the year ended March 31, 2008, SABMiller earned $2.29 billion compared with $1.88 billion a year ago. Profit attributable to equity shareholders rose to $2.02 billion or 134.2 cents per share from $1.65 billion or 109.5 cents per share last year.
SABMiller's adjusted earnings for the year increased to $2.15 billion or 142.4 cents per share from $1.8 billion or 119.3 cents per share in the prior year. The improvement in earnings is attributed to higher revenues, mainly in Latin America, Europe, Africa and Asia, and strong currency and lower effective tax rates in certain jurisdictions.
Revenues for fiscal 2008 were $21.41 billion, up 15% from $18.62 billion in the previous year. Total beverage volumes were up 6% in fiscal 2008 to 288 million hectoliters* (*1 hectoliter = 100 liters). SABMiller controls about 18%-19% of the U.S. beer market. Over the past five years, SABMiller stock has gained nearly 304% and currently trades around 1,144 pence a share.
InBev, which is now eyeing Anheuser-Busch, is itself the product of a merger between Belgium's Interbrew and Brazil's Am-Bev. In March 2004, Interbrew, which was then the world's No.3 beer firm and maker of Stella Artois and Beck's brands, acquired Am-Bev, ranked No.5, for $11.5 billion in a share swap deal. Am-Bev's brands include Brahma, Antarctica and Skol.
The merger catapulted the combined company, InBev as the world's largest brewer by sales volume, trumping Anheuser-Busch and SABMiller, which were then holding the No.1 and No.2 positions respectively. In the latest standing, SABMiller is ranked the world's largest brewer by volume and InBev is ranked the second.
InBev's profit attributable to equity holders for 2007 climbed to 2.19 billion euros from 1.41 billion euros a year earlier. Revenues increased 7.2% to 14.43 billion euros from 13.31 billion euros in 2006. Total beverage volume sold, including both beer and non-beer for 2007 totaled 270.6 million hectoliters, reflecting a 5.2% growth over 2006. Over the past 4 years, InBev stock has gained 76% and trades around 44 euros.
In order to cut production costs and gain greater leverage to raise beer prices, U.S.-based Adolph Coors Co. and Canadian brewer Molson Inc. merged in February 2005 to form Molson Coors Brewing Co. (TAP | Quote | Chart | News | PowerRating) and now has about 11% share in the U.S beer market. Coors acquired Molson for $3.4 billion.
For fiscal 2007, Molson Coors earned $497 million or $2.74 per share, on net sales of $6.19 billion. This compared with net income of $361 million or $2.08 per share and net sales of $5.84 billion in 2006. Brand strength, positive pricing, and the benefit of favorable foreign currency contributed to the improved results. Beer sales volume for the year declined 0.2% to 42.05 million barrels from 42.14 million barrels in 2006, mainly due to the termination of the Foster's U.S. production contract in the fourth quarter of 2007. Molson Coors has gained 90% over the past three years and trades around $54. As part of its three-year, $250 million 'Resources for Growth' program, Molson Coors realized $146 million in cost-saving initiatives in 2007.
As recently as October 2007, SABMiller and Molson Coors revealed their plans to combine their U.S. operations in order to better compete with Anheuser-Busch and increase their market share in the U.S. The joint venture will operate under the name MillerCoors and will have a market share of about 30%.
The combination brings the two companies, which have been marketing rival brands in the U.S. together. Coors Light marketed by Molson Coors is a longtime rival brand to SABMiller's Miller Lite. The joint venture is expected to result in cost savings of $500 million over three years, mainly from elimination of overlapping jobs, reducing transportation costs and optimizing production.
Early this year, Scottish & Newcastle, Britain's largest brewer agreed to a buyout by its rivals Heineken and Carlsberg for $15.4 billion.
….. The News Making A Splash
It's no secret that though InBev has outpaced Anheuser-Busch in beer sales, Anheuser-Busch's Bud Light and Budweiser remain the top two selling beer brands in the world. Anheuser-Busch claimed 52% of the U.S. beer market in 2002, up from 28% in 1980, according to Impact Databank, a market research firm. Now, the company's share in the U.S. beer market is 50.9% (as of the first quarter). Anheuser-Busch also owns a 50% share in Mexican brewer Grupo Modelo and a 27% share in Chinese brewer Tsingtao.
Sales of Bud Light and Budweiser continue to remain hot outside the U.S., though Budweiser has been losing market share domestically. According to industry newsletter Beer Marketer's Insights, shipments of Budweiser in the U.S. dropped 33% to 24.6 million barrels last year from 36.9 million in 1998, while shipments of Bud Light were up 61% to 42 million barrels.
Budweiser remains the No.1 super-premium brand in China, and the company is expanding it into 100 new markets by 2010, allowing the brand to reach an incremental 250 million new consumers.
Sales of Budweiser and Bud Light were up 27% in 2007 in Mexico. Outside the U.S., Bud Light is sold only in Canada, Ireland, Mexico, Colombia and Sweden.
In India, Anheuser-Busch has a joint venture with Crown Beers International, Ltd., to brew, market and distribute Budweiser and other brands. Early last week, Anheuser-Busch announced it will purchase the remaining 50% ownership of the Crown Beers India Ltd. joint venture from its partner, Crown International. Given the strong economy, large population and a growing middle class, market observers believe India can offer a good long-term potential for Anheuser-Busch.
In Canada, Budweiser is the most preferred beer and Bud Light is the country's fastest-growing beer and seventh best-selling beer brand, with Bud Light volume growing 30% in 2007.
.... So it's no wonder that InBev fascinated with Bud Light and Budweiser will like to own Anheuser-Busch, the maker of those global, iconic brands, more so at a time when the euro is gaining against the U.S. dollar.
Defensive Tactics - No swill?
Aiming to run a tight ship and return more money to shareholders, on June 27, a day after rejecting InBev's buyout offer, Anheuser-Busch revealed its strategic plans for the future. The company is quite optimistic that its strategic plan will deliver greater value than the $65 per share offered by InBev.
In the recent first quarter, Anheuser-Busch's net income declined 1.3% to $511 million from $518 million in the year-ago period. However, earnings per share for the quarter increased to 71 cents from 67 cents last year. The increase in per share earnings was due to the company having fewer shares outstanding in the recent first quarter because of the ongoing share repurchase program. The company's earnings missed Wall Street's expectations of 72 cents.
Consolidated net sales for the first quarter increased 6.2% to $4.10 billion from $3.86 billion last year and topped analysts' revenue consensus estimate of $4.05 billion. During the first quarter, volume of beer sold in the U.S. was 25.8 million barrels, representing a 0.4% increase over 25.7 million barrels sold in the country during the year-ago period.
In a conference call on June 27, Anheuser-Busch announced its decision to slash jobs, increase beer prices and boost share repurchase targets. The company has raised its cost cutting target to $1 billion, the bulk of which would come this year and next year. An early retirement program is also set to be rolled out.
As part of the cost-cutting effort, Anheuser-Busch has planned to slash 10% to 15% of its full-time, salaried work force through an enhanced retirement program. Anheuser-Busch expects to incur a one-time pretax enhanced retirement and severance costs in the range of $300 million - $400 million for the fourth quarter.
The company has also lowered its capital-spending targets for 2008 and 2009 by $100 million and $200 million, respectively.
Anheuser-Busch expects earnings of $3.13 per share, excluding one-time items, for 2008. For 2009, the company expects earnings of $3.90 per share, followed by double-digit percentage increases in the next three years. FirstCall has earnings estimates pegged at $3.01 per share for 2008 and $3.29 per share for 2009.
August Busch IV, the CEO of Anheuser-Busch and his father August Busch III, who is now a Director of Anheuser-Busch, are strongly opposed to the company's takeover by InBev. After all, being members of the founding family, they will never want the American business icon as old as 132 years to be taken over by a foreign company. But that said, the Busch family owns only about 3.5% of the company and it will not be able to hold off InBev, if shareholders and management decide otherwise, in the event of InBev sweetening the offer.
Warren Buffet's Berkshire Hathaway Inc. with a 4.99% stake is the second largest shareholder in Anheuser-Busch, next to Barclays, which has a 6.1% share. According to 2008 Senate financial disclosure statements, Republican presidential candidate U.S. Senator John McCain's wife Cindy McCain owns about $1 million of Anheuser-Busch shares. She is the chairwoman of Hensley, the third-largest Anheuser-Busch distributor in the United States. It remains to be seen how these high profile shareholders will be able to influence the takeover battle between the beer giants.
The local community in St. Louis, where Anheuser-Busch employs 6000 people is also against the deal because InBev's acquisition strategy includes sharp cost cutting through staff elimination.
Meanwhile, it has been widely reported that Anheuser-Busch is planning to acquire the remaining 50% share in Mexican brewer Grupo Modelo, in order to fend off InBev's hostile bid, as a combined Anheuser-Busch and Modelo will be too expensive for InBev to purchase.
In a letter sent to the Board of Anheuser-Busch on June 15, Carlos Brito, CEO of InBev wrote, "It is our strong belief that no alternative transaction that you could effectuate would create more value for your shareholders than the $65 per share in cash that we are offering. We are convinced that your shareholders would reach the same conclusion."
However, the bar brawl is likely to intensify as the Belgian brewer is likely to take its offer directly to Anheuser-Busch shareholders. On June 26, InBev filed a suit in Delaware Chancery Court, seeking a judgment to confirm that shareholders can remove without cause all 13 of the present Anheuser-Busch directors. There were 14 members on the board until Carlos Fernandez, chairman and CEO of Grupo Modelo resigned from the board last week.
InBev and Anheuser-Busch - A good fit?
Anheuser-Busch's operations are focused mainly in the U.S. In the first quarter of 2008, the U.S. accounted for 83% of sales volume of Anheuser-Busch's brands. On the other hand, InBev, which derives most of its profit from Latin America, has almost no presence in the U.S. InBev and Anheuser-Busch already have a partnership, as Anheuser-Busch is the exclusive importer of several InBev brands including Stella Artois, Beck's and Bass Pale Ale. Acquiring Anheuser-Busch will be a complimentary fit for InBev.
Some industry observers fear that a clash of culture is bound to happen if the deal goes through. InBev has continued to grow through acquisitions, in sharp contrast to Anheuser-Busch, which shows little interest in striking major deals.
Though InBev has assured that it will retain the Anheuser-Busch management at all levels of seniority and will not shut down any of Anheuser-Busch's U.S. breweries following the acquisition, those assurances need to be tested. After all, InBev's management style includes extensive cost-cutting and "incentive-based" employee compensation. According to analysts, Inbev will have to save $1.4 billion in costs to make the deal successful.
InBev's offer represents a premium of 35% over the 30-day average share price of Anheuser-Busch prior to recent market speculation and 18% above the previous all-time high achieved in October 2002. Since the buyout offer Anheuser-Busch has gained nearly 7% and currently trades around $62.
Conclusion
Though "Corporate marriages very rarely end in bliss", as pointed out by a New Yorker article, mega mergers continue to follow.
Anheuser-Busch's statement that it 'will continue to consider any strategic alternatives that would be in the best interests of Anheuser-Busch shareholders', leaves the door open not only for further negotiations with InBev but for rival bids as well.
Will Anheuser-Busch be able to continue as an independent company or succumb to a takeover? Only time will tell!
For comments and feedback: contact editorial@rttnews.com Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved
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