InBev and Anheuser-Busch Cos. remained silent Tuesday over news reports last week that the Belgian brewer was preparing a takeover bid for the St. Louis brewer. But analysts spoke out about problems such a deal could create.
A chorus of industry observers doubt that a tie-up between InBev and A-B—the world's No. 1 and No. 3 brewers by volume—would work out well. One big worry: If InBev were to gut the St. Louis-based brewer's marketing and distribution machine in an effort to squeeze out more profits, Anheuser-Busch's sales and morale could stumble badly.
Plus, InBev might have to saddle itself with $47 billion or more in new debt to finance the deal—not an easy proposition in the tight credit markets.
Citing anonymous sources, the Financial Times reported Friday that InBev was preparing to make a offer of $65 a share for Anheuser-Busch, though InBev was "not about to push the button."
InBev also is looking into a possible offer for London-based SABMiller in case the Anheuser-Busch offer fizzles, according to the Financial Times. InBev, Anheuser-Busch and SABMiller declined to comment.
Some observers worry that the $65-a-share offer—a 24 percent premium to Thursday's closing price—is too high for Anheuser-Busch's good, demanding draconian measures to help InBev get back its investment.
"We have concerns that such a high price requires aggressive cost reduction," Deutsche Bank analyst Marc Greenberg advised investors Monday in a research note. It "risks harming brands, distribution and execution. These are not positive changes, but simply what's necessary to feed (InBev's) ever-hungry global deal machine."
Still, a $65-a-share offer may prove too enticing for Anheuser-Busch shareholders. A-B's largest shareholders are asset manager Barclays Global Investors, which controlled a 6.1 percent stake, and Warren Buffett's Berkshire Hathaway Inc., which held a 4.99 percent stake, according to the most recent data compiled by Bloomberg News.
Meanwhile, A-B chief executive August A. Busch IV and his father, August A. Busch III, who also sits on the company's board of directors, together owned only 1.7 percent of the brewer's common stock as of Jan. 31. In total, board directors and executive officers owned 4.5 percent of the company.
So institutional and individual shareholders will have the upper hand when it comes to a decision because the brewer gave up defenses that typically protect a public company from a hostile takeover.
According to the earlier Financial Times report, InBev would target cost savings of $1.4 billion by 2011 if it took over Anheuser-Busch—the maker of Budweiser, Bud Light and Michelob.
That is a staggering number. It would amount to about 10 percent of Anheuser-Busch's total costs, and about 45 percent of its selling, general and administrative expenses. The skeptics wonder: How will these savings come to be?
If InBev were to buy Anheuser-Busch, the global brewing juggernaut would be expected to try to use its brawn to get better terms from suppliers of barley, hops and other materials.
But Greenberg noted in his research report that suppliers face serious cost pressures of their own and may be reluctant to budge.
The lack of direct geographic overlap between the two companies' brewing operations and logistics could make it harder for InBev to achieve its cost cuts, skeptics say.
"It is unclear how InBev can create significant shareholder value," Goldman Sachs analyst Judy Hong wrote Friday. "Generating high cost savings will be hard."
With little easy fat to trim, the gap between optimistic expectations and the grim reality of cost cutting may lead to a serious clash of cultures, according to Morningstar analyst Ann Gilpin. She echoed a grave concern: that slicing costs would simultaneously whittle away at the morale of Anheuser-Busch's employees and wholesalers -- the company's crucial link to retailers and drinkers.
Even if InBev allowed Anheuser-Busch to operate as an independent company, in the long term, the company's new masters would want to "take a machete to operating costs"—something the folks at Anheuser-Busch might not be prepared to accept, Gilpin said.
InBev's zero-based budgeting, in which it builds a budget from scratch every year and demands justification for all spending, "is not the greatest thing since sliced bread," Greenberg wrote. "InBev's rigorous cutting brings us to a period where performance in developed markets has been weaker than forecast. Cost reduction as a sole rationale has a shelf-life."
InBev, the seller of Stella Artois and Beck's, may want to diversify away from its dependence on Latin America, and particularly Brazil—a dependence Deutsche Bank analyst Jonathan Fell calls one of the chief risks facing InBev shareholders.
But a major concern would be that a takeover of Anheuser-Busch would entail replacing one problem with another, Fell wrote in a research note: "Put simply, Bud has been struggling to generate significant growth from its major market, the U.S., in recent years." InBev might run into the same difficulty if it tried to kick-start Anheuser-Busch after slicing out excess costs, he stated.
"The real issue for Anheuser-Busch was not, are they successful or are they profitable, but how can they grow?" said Ken Crawford, portfolio manager at Argent Capital Management in Clayton.
Like many Fortune 500 companies, Anheuser-Busch has unwound its takeover defenses in response to shareholder's concerns, leaving it with few shields against a takeover.
"Brick by brick, the protections against a takeover that they've built up over a number of decades has been basically dismantled," said Patrick McGurn, special counsel with RiskMetrics Group, a corporate governance advisory firm.
The company no longer has a "doomsday defense" in place that would allow the board of directors to "just say no to a takeover," he said. If InBev makes an offer, "They're going to have to negotiate."
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