Another One Bites the Dust!

But what about the Clydesdales??

Another American company is swallowed up in an International buyout. Another beer company this time – an American institution, no less. Quoting from an article in the Economist…

Anheuser-Busch was attempting to rebuff an assault by its Belgian-Brazilian rival, which had offered $46 billion in an unsolicited bid on June 11th. Anheuser-Busch tried to use the business equivalent of a bar stool over the head—a lawsuit claiming that InBev had misled investors. The American firm even dealt the low blow of citing InBev’s Cuban businesses as a reason to reject the bid.

These tactics came to nothing, however, after InBev opened its wallet and upped the offer to $52 billion, which Anheuser-Busch gratefully accepted on Sunday July 13th. In fact InBev had been prepared to fight sneaky too. In an effort to outflank the founding Busch family (which currently owns only 4% of the company’s shares) it used family disagreement. The bidders proposed a new board of directors that would include Aldolphus Busch, the uncle of August Busch, the existing chief executive of the American firm who was dead against the merger. Adolphus promptly urged Anheuser-Busch to accept InBev’s offer.

Anheuser-Busch had come up with its own cost-cutting plan to counter the offer from InBev. But that was no match for Inbev’s hard cash, particularly after it agreed to raise its offer to $70 a share. Agreeing to the deal at this price is probably a better outcome than dealing with a long and distracting hostile bid. The deal is a good one for many reasons.

Mature market brewers such as Anheuser-Busch, can be fantastically profitable, even if growth is negligible and handy targets are in ever shorter supply. In emerging markets demand is volatile and margins are slim. Growth in beer drinking in these new markets has suffered as food prices have spiralled. The rising prices of beer’s main ingredients (barley for the drink, aluminium for cans) have cut margins slimmer.

InBev, by buying Anheuser-Busch, will insulate itself against the volatility of emerging markets—over a half of its profits come from its Latin American operations. Although there is little overlap with operations in America Anheuser is generally reckoned to be ripe for some cost cutting. Although InBev pledged that no brewery closures would take place, it wants to make savings of $1.5 billion by 2011, which suggests some workers will go. InBev reputation for ruthless efficiency could also mean that Anheuser-Busch’s famous Clydesdale horses are put out to pasture.

The merger of the world’s number two and number three brewers by volume will create a combined company with more than $36 billion in annual revenues and a better negotiating position with suppliers of expensive ingredients. The two will also gain extra traction in China with their combined operations. The beer market there is enticing because of rapid growth, but it is also highly fragmented and hard for big western brewers to crack.