The Bid for Bud

After several months of rumor and a meeting between the two companies' CEOs, InBev made an official offer to purchase Anheuser-Busch on June 11, 2008. Since the beginning of InBev's hinted interest in the company on May 22, Anheuser-Busch's stock price (at $53 per share) had started to soar. InBev said that its long-term plan for Anheuser-Busch was to continue to run its U.S.-based breweries; keep St. Louis, Missouri, as North American headquarters; add Anheuser-Busch to InBev's name; and offer several current Anheuser-Busch board members seats on the combined firm's board. Brito sent Busch IV a letter outlining intentionsexcerpts included:

Webelievethatthebestwaytoachievethistransformationalcombinationforallconstituents, includingAnheuser-Busch'sshareholders,isanall-cashacquisitionofAnheuser-BuschbyInBev.InBev is prepared to pay $65 per share in cash for all of the outstanding share of Anheuser-Busch. A price of $65 per share would deliver to your shareholders an immediate cash premium of 35% over the 30-day average share price prior to recent market speculation and 18% over the previous all-time high achieved in October 2002. Together we would be the leader in the industry and one of the top five consumer products companies globally, with pro forma 2007 beer volumes of 460 million hectoliters, net sales and EBITDA of $36.4

billion and $10.7 billion, respectively.

Busch IV had responded to InBev's initial advances with assurances that he wasn't interested in a merger. The hostile bid now placed Busch in a bind, because the market's reaction to it reflected more of an increase in stock value than Anheuser-Busch management had been able to achieve in seven years. (See Exhibit 3 for stock price chart.) To an external investor, it was a good deal. And when compared to recent past performance and the fact that Anheuser-Busch's shares had not surpassed the $60-per-share peak value for some time, it would certainly be attractive to shareholders. Busch IV felt strongly, however, that the current bid of $65 was too low.

FoodandbeveragedealsintheUnitedStatesoverthepastfewyearshadaveragedaround11EV/EBITDAbuthadgoneashighas14.Busch IVfeltthatthecompany'sprospectswereanythingbutaverage. Heineken had recently completed an acquisition of a "mature asset" for 11.9 EV/EBITDA.

Some on Wall Street believed that the firm had put itself in an almost defenseless position. "[Anheuser-Busch] made big missteps, but it made them two years ago when they declassified the board," one analyst said. "Once [they] did that, they were always a sitting duck."

In addition to the board action, the firm had let its poison pill expire in 2004.

If the provision were still in play, or reinstated, it would have stopped any hostile bid from buying more than 20% of Anheuser-Busch's stock .Furthermore, the Busch family likely would have been unable to play much of a role in opposing the bid because it owned less than 4% of the shares.

Despite those issues, Busch IV believed he might have room to decline the offer. The company had recently told "the Street" that it expected significant cost savings from both a decline in capital expenditures (CAPEX) and expectationsformarginimprovement.Whereas recently,CAPEXhadbeenrunningatjustover5%of sales, the company anticipated a decline in the 3%-to-4% range over the next several years. Likewise, Anheuser-Busch had experienced a meaningful increase in cost of goods over the past few years as a result of a surge in commodity costs, specifically hops and barley. Increases in energy prices hadn't helped margins either. Despite expectations for these costs to continue to rise slightly in 2008, Busch IV felt the company was getting a better handleonthingsand,anticipatingabetterproductpricingenvironment,

feltitshouldbegintoseemarginimprovementin2009andbeyond.(See Exhibit4foroperatingandfinancialprojections,includingsome

synergies Busch IV identified from a reduction in CAPEX.)InBev would need to take on a significant amount of leverage to make the all-cash deal, and Anheuser-Busch could make it more difficult for InBev to pursue this acquisition if it required InBev to pay a lot more than originally planned. If Anheuser-Busch instituted a change in management philosophy, making cuts in staff and expensesor divesting some assetsit might send a signal to the market that Anheuser-Busch was willing and able to manage operations in a more efficient and profitable manner. In a way, this would be stealing a page from the InBev playbook. If the margin improvements Anheuser-Busch outlined were realized, earnings-per-share growth would show significant improvement over the next several years, likely having a knock-on effect on valuation. Anheuser-Busch could also continue to accelerate its share repurchase program. Still, the bottom linewasthatdomesticsalesweregrowingat

onlyabout2%peryearandinternationalgrowthwasexpected to be somewhere in the 5%-to-6% area.

Questions:

1.The forecasts in Exhibit 4 were produced by Anheuser-Busch, and therefore reflect AB's managers' assumptions.Identify at least three assumptions that have substantial impact on the firm's projected cash flows that you find questionable.What alternative assumptions would be more reasonable?

2.ImBev's motivation for acquiring AB is to expand its market in North America and to do so while cutting costs.Suppose that ImBev expects eventually to generate synergies that reduce production costs by 2 billion euros per year - or approximately $3.0 billion at the 2008 exchange rate - when the merger is fully implemented.However, it will take five years to completely realize these synergies.Synergies will begin at $600 million in 2008 and increase by $600 million in each of the next four years until the full $3.0 billion in cost savings are realized in 2012 (and beyond).

a.Where might those synergies come from?That is, what are the main sources of cost savings in this deal?

b.Adding these cost-saving synergies to AB's forecasts from your previous analyses, what is Anheuser's Busch value to ImBev?Show your calculations.