This Bud May Be for the Belgians

Why Anheuser-Busch may well accept the $46 billion offer from Europe's InBev to buy the St. Louis brewing giant

After weeks of mulling an offer for Anheuser-Busch (BUD), Belgian brewer and soft drinks giant InBev made an unsolicited offer to acquire the U.S. parent company of Budweiser beer for $65 a share, or $46 billion. The St. Louis brewer reported on June 11, after the close of trading on the New York Stock Exchange, that it had received the bid.

The offer represents an 11% gain on Wednesday's close of 58.35 and a 42% premium over the stock's 52-week low of 45.55. (That low was set, oddly enough, on Mar. 17, St. Patrick's Day, second only to the Super Bowl as the biggest beer-drinking day in the U.S.) The offer is about a 24% increase over where shares were trading just before InBev's interest surfaced last month. Shares of Anheuser rose 7% in after-hours trading on Wednesday.

Anheuser said in a statement that its board would "evaluate the proposal carefully and in the context of all relevant factors, including Anheuser-Busch's long-term strategic plan." But management, led by CEO August Busch IV, has signaled for weeks that it opposes a takeover.

InBev's Uneasy Funding Package

InBev, the world's largest brewer, which owns Becks, Stella Artois, and Labatts among other brands, was formed from the 2004 merger of Belgium's Interbrew with Brazil's AmBev. InBev's sales last year were 30.6 billion euros ($47.6 billion). Anheuser's sales last year were $17 billion. InBev has just a marginal presence in the U.S. but a mature business in Western Europe. The company has been working on arranging a $50 billion-plus funding package from banks to finance the proposed deal, which has been difficult as major financial institutions have been reeling from investments in the subprime mortgage meltdown.

The Busch family, while certainly influential, does not own enough stock—less than 4%—to block a takeover. And investors have said that a fair bid from InBev should be taken seriously. "I don't think $65 is a bad price because if the company stayed the way it is now, it certainly would be, on average, two years before the stock reaches that level on a sustained basis," says Stephen Jarislowsky, chairman and CEO of Canada's Jarislowsky, Fraser, which owned 1.7 million Anheuser shares as of Mar. 31. "A takeover would expand the globalization of their franchise, and we like that," says Duncan Richardson, chief equity investment officer at Eaton Vance (EV), the 10th-largest Anheuser shareholder, with 5.5 million shares.

And even members of the family do not seem to be standing squarely behind the CEO. Adolphus A. Busch IV, an uncle of the company's current CEO, said in a recent statement that a merger is "not a family issue…nor is it a matter of family solidarity or legacy. It is strictly a matter of shareholder value…It is no secret that the sluggish performance of the stock is a concern."

Critics of Anheuser-Busch's performance in recent years point to a culture that needs to be shaken up—one that is perhaps still too focused around the idea of a family-run business.

Blue-Collar Blues

Anheuser's U.S. market share is under 50%, down from 52% in 2002, which was longtime CEO August Busch III's last year as chief executive of the company. He had built it up from 23% in 1975, according to Impact Databank. Anheuser-Busch is bedeviled by the gradual shift away from blue-collar beer like Budweiser by baby boomers and Gen Xers. Sales of wine, spirits, and small-batch craft beers have all been climbing, while Budweiser's business slips. And the company has not been sufficiently invested overseas to take advantage of developing markets to the degree that SABMiller and InBev have done.

Anheuser owns half of Grupo Modelo in Mexico, and it has made an investment in China. But it has not invested in Latin America, Eastern Europe, or Africa. Under Busch IV, the company began importing some 20 of InBev's overseas brands, a relationship that helped spark the Belgian company's interest in taking over Anheuser.

CEO Busch, 44, who is being advised by Goldman-Sachs (GS) on the InBev offer, has been in the top job for only 18 months. In April, when rumors of a takeover attempt by InBev began to surface, Busch was addressing the company's distributors and said the company would not be sold "on my watch." Ex-CEO August Busch III, father of the current CEO, is also known to oppose a sale.

Brand Experiments

It's not as if Busch IV hasn't been feeling the heat even before InBev surfaced. The languishing share price last year moved him to initiate a plan earlier this year to boost revenue from the company's core brands, including more marketing spending and a 40% increase in the company's sales force. Besides lack of investment in products that attract upper-income drinkers, part of the company's problem with its core business is that it is losing more drinkers of regular Bud than it has been gaining with Bud Light. Last year, the company's sales of Bud Light were up 800,000 barrels—but sales of Budwesier were down 1.2 million barrels.

Busch IV has been the prime mover for years behind the company's often irreverent and humorous advertising, and the company's huge commitment to advertising on the Super Bowl. He also steered the company into brand extensions that have not always worked out. Before becoming CEO, he had pushed for the unsuccessful Bud Dry. He also drove Bud Ice. And Bud Select. Earlier this year, the company launched Bud Lime in an answer to Miller's successful Miller Chill extension, as well as to lure younger, upper-income beer drinkers, and women who drink Corona with lime, and who favor flavored vodkas. Early sales are promising. Anheuser is also readying a new line called Budweiser American Ale aimed at cutting into craft beer sales.

Some of the opposition to a takeover of Anheuser-Bush, the world's third-largest brewer, is emotional. It is the last U.S.-owned beer giant. Miller Brewing is owned by South Africa's SABMiller, the world's second-largest brewer. "That will gin up a lot of hand-wringing, but this is a global economy, and those considerations don't wash anymore," says Dennis Keene, an independent marketing consultant. "Nobody stopped drinking Miller when it was sold, and Wild Turkey bourbon is owned by the French."