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Many a boozy wedding has ended up hosting a brawl – albeit not usually involving the bride and groom. Still, InBev’s planned marriage to Anheuser-Busch seems to be heading that way. The Budweiser brewer has formally rejected InBev’s $65-a-share proposal. InBev, meanwhile, has given up on the sweet-talking and now threatens a fight.
Neither side has an ironclad position. Anheuser labours under the fact that it has let margins slide and its share price flatline over the past five years. When presenting its plan on Friday to boost the bottom line with more cost cutting and share buybacks, the obvious question was asked: why didn’t you do this before?
In that context, InBev’s offer looks attractive. But it does not look like a knockout blow. In part, this is due to the whiff of opportunism. InBev has had a rocky first half, raising questions about its ability to keep juicing its own profits with cost cuts. In addition, the multiple of 12 times 2007 earnings before interest, tax, depreciation and amortisation that InBev claims to be offering appears to understate the profits contributed by Anheuser’s stakes in Modelo and Tsingtao, which are not fully consolidated in its accounts.
Above all, however, the weakness in InBev’s position stems from the importance of costcutting in making the deal stack up. InBev clearly has a good record at doing this. But, equally, even if it has taken the shock of an unsolicited proposal to force Anheuser’s board to focus on the issue, it can argue that it can also cut costs without the need to engage in a merger. Taken at face value, the defence plan implies a standalone stock price of $68, according to Bank of America.
No shareholder in their right mind would take a defence plan at face value and Anheuser’s board is asking a lot of shareholders to trust it. However, its plan is credible enough to make an attempt at a forced marriage look very dicey. InBev may have to offer more to smooth a path to the altar.
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