Market Jitters Enable Even Small Investors to Get a Piece of BUD
Anheuser-Busch (BUD) shareholders-of-record as of October 3, 2008 will vote on November 12, 2008 to approve the sale of the company to Belgian brewer InBev (INBVF.PK) for $52 billion. InBev claims to have solid financing already in place for the transaction and one would assume that such a deal would have great appeal to most bankers in this treacherous environment. Yet, over the past few weeks, BUD stock has been trending downward, rather than closer toward the $70 per share cash acquisition price. If anything, this demonstrates just how edgy the markets are right now.
Here you have the stock of an iconic American brand with dominant domestic market share which is being acquired by an equally imposing foreign brewer in a combination that will create an international powerhouse. Yet, the stock is currently trading at $62 and change, 89% of the expected acquisition price in only a few months' time. Investors willing to buy BUD shares at the current price will get an 11% pop when the transaction is completed—which both companies hope will be before year end. Furthermore, BUD pays a 2.3% dividend, with another quarterly payout due in early December. This much of a discount to the $70 take out price signals that the market might have questions about whether or not this deal will get done.
Perhaps the surging dollar has some believing that InBev will get cold feet before completing the transaction. Perhaps the market believes—despite assurances to the contrary— that financing is not completely lined-up or could become a problem. This seems unlikely. While the credit markets are certainly distressed right now, there is money available to lend for quality deals and this deal meets that criteria. Few enterprises are as recession-resistant as a mega-brewer with solid brands in all continents. In the unlikely event that the deal fell apart, worst case scenario might see BUD stock trade back into the upper forties where it had been parked for some time. While that would be a 22% drop from its current level, BUD has a far firmer floor underneath it than many stocks right now. Its better-than-money market dividend yield and strong history of increasing the dividend are also worthy of noting.
This is a tough market to coax investors into. Thus, it is time for a little unconventional thinking. Normally, only big arbitrage players can profit from trading stocks (of both the buyers and sellers) after a merger deal becomes public knowledge. In this case, due to the current morose investment climate, you have the opportunity to buy BUD stock today at an eleven percent discount to a cash sale that will most likely occur sometime within the next three to four months. You also will get one quarter’s dividend if you buy before the early November ex-div date. To Ockham, this seems like a fairly safe way to make some good money in an otherwise tough stock market.
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This article has 2 comments:
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nokdzplz
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12 Comments
Oct 08 07:17 AM-
weiwentg
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80 Comments
Oct 17 08:37 AMThat comment alone makes me distrust just about everything else you said. Anheuser mispositioned itself, concentrating on Budweiser and refusing to move upmarket to craft beers. This completely missed the trend in the US market, which was to craft beers, spirits and wine. Additionally, the firm failed to move into the international front (hence InBev had to do it for them). As a result, they had a couple years of quite weak results. Their management team was certainly not best of breed.
As for the arbitrage issue, think about it. If Ockham's analysis is right, they won't need anyone other than InBev to prop the price up. InBev will (they hope) pay out $70 in cash at the end of the year. Of course, the downside if InBev doesn't get the financing is more considerable; Anheuser would drop to the high $40s or low $50s.
My understanding was that InBev does have the proper commitments from the banks. Several of InBev's European banks were in trouble (Fortis was one of them). Beer is a relatively steady business and InBev has a great international distribution network. InBev paid a pretty high price, but they should definitely be able to make their payments. The banks, therefore, would probably want to make this loan.