Who will buy Anheuser-Busch?

For a few weeks now the world’s financial centres have been abuzz with a possible USD 45 billion bid by InBev for Anheuser-Busch.

I do feel sorry for Anheuser-Busch. Honestly. I mean their top brass often lacked dress sense and manners but to have all the world talk about Anheuser-Busch being taken over by some upstart “machete wielding Brazilian investment bankers” (not my description but a U.S. colleague’s), that’s unfair. However, the world has never been good or just. And in this case, the fault is all Anheuser-Busch’s. While Heineken, Interbrew and SAB went international in the 1990s, investing in emerging markets, where the risks were high but the potential profits even higher, Anheuser-Busch decided to play it safe. Their expansion policy was cautious. Overly-cautious, in retrospect. Because where is Anheuser-Busch today? In the U.S., … the U.S., … the U.S., … a bit in China, a bit more in Mexico. Err, that about sums it up, doesn’t it? Trouble is, the U.S. beer market is basically flat, the U.S. dollar is weak and Anheuser-Busch’s shareholders displeased. To put it bluntly: right now Anheuser-Busch is a bargain.

What has Anheuser-Busch to offer? Quite a lot still. It is the undisputed number one in the U.S., the world’s most profitable beer market in absolute terms, and it has a 50 percent stake in Mexico’s Grupo Modelo. Sorry, readers, I have to bring this in because the potential offer by InBev has implications that do not immediately meet the eye of the armchair beer strategist.

Modelo is doing ok (EBITDA 30 percent) yet could be doing much better (50 percent EBITDA) if it were run better. The Mexicans have so far been able to resist Anheuser-Busch from micro-managing them as they have been able to resist Anheuser-Busch from wholly owning them. Thanks to a complex voting block agreement on their board, no Mexican shareholder has been able to sell his shares to Anheuser-Busch – something Anheuser-Busch has been waiting for patiently for 14 years ever since they made their first offer for a stake in Modelo. It is somewhat macabre to mention it but Modelo’s future hinges on the life of a 90 year old board member, who exercises total control over the other Mexican board members. From what one hears, some Mexican board members would rather sell to Anheuser-Busch today than tomorrow. Alas, they are prevented from doing so. Now, Anheuser-Busch has known as well as InBev about the other half of Modelo coming up for sale if that particular board member decides to … let’s say quit. If Anheuser-Busch played their cards well they could buy the rest of Modelo and become so expensive themselves that no one could take them over. At least, a combined Anheuser-Busch-Modelo would be a very big company to swallow for a competitor.

That’s what InBev knows too and that may be one of the reasons why the Brazilians have decided that if they want to buy Anheuser-Busch they have to do it now before Anheuser-Busch has a chance to move in on Modelo. But there are other considerations to bear in mind too. InBev may be a big company whose management has been good at deal-making and cost-cutting but they have not exactly been covering themselves with glory when it comes to selling beer and marketing beer brands. Think of the Stella Artois disaster in the UK, or what’s become of Beck’s and the other brands they have gobbled up on their purchasing spree.

InBev needs a deal and it needs marketing talent - talent that Anheuser-Busch have. Anheuser-Busch’s people have for a long time proven themselves as very capable beer marketers. Even if InBev, post a takeover, would throw out a lot of Anheuser-Busch’s workforce they would try to make an effort to keep a certain amount of talent.

What can Anheuser-Busch do at this stage? Nothing, really. The current Busch heading Anheuser-Busch, August Busch IV and his father August Busch III together owned only 1.7 percent of the company’s common stock as of 31 January 2008. Directors and executive officers owned 4.5 percent of the company. Needless to say that both August Busch III and IV oppose a deal. However, Adolphus Busch, a half-brother of the chief executive, recently expressed the opinion that if a good deal is ever put on the table, it should be considered. Such a rift in the founding family is what you get if, as a chief executive, you are more concerned with corporate patriotism and family pride than with raising shareholder value.

So far InBev has not made an official offer so it does make any difference if they will eventually have to pay USD 45 billion or USD 50 billion. Obviously, most people in the financial world seem to believe that InBev will be able to secure financing for that sort of deal. Looks like Anheuser-Busch’s fate is sealed.