What Is Anheuser-Busch Worth?

What’s Anheuser-Busch worth? Well, that all depends who you ask. According to InBev’s bid, the answer is a cut-and-dried $65 per share. According to the Anheuser-Busch (NYSE: BUD  ) board, the company is worth more, though the board is “not going to put a price tag on our company or our iconic brands.”

On the surface, this seems like a standard reaction to a takeover attempt. Always reject the first bid; if the suitor really wants what you have, they’ll raise their price. This is a first date, not a wedding night (or third date, depending on the social mores of your locale). Unlike the singles scene, however, corporate boards need solid justification to reject an offer as too low (or ugly, or sweaty, or poorly groomed, or malodorous).

Anheuser-Busch and its board claimed that the InBev bid is too low. In their response, they actually claimed that it “fails to be competitive with alternative plans the company has developed in recent months.” Not just that it undervalues the company, but that it fails to be competitive -- that it’s not even in the ballpark.

In my opinion, this statement is ludicrous, and Anheuser-Busch’s reaction to the solicitation has been somewhere between terrible and incompetent. I’ll lay out why in a minute, but for now, I think the answer to “What is Anheuser-Busch worth?” is quite simple: Whatever InBev says it is worth. Otherwise, investors will be reacquainted with $52.58 per share very soon.

Dismal performance
Anheuser-Busch’s total return performance over the past five years has been simply dismal. The company’s 2007 10-K calculates the five-year compound annual total return growth rate through 2007 at 3.8%. It even displays a graph, showing A-B shareholders the trajectory of their returns, which are dwarfed by both the S&P 500 and Russell 200. What has changed recently to give the board hope that these trends will reverse quickly and dramatically? All I can see are sky-high commodity costs and a 1.4% volume decline for Anheuser-Busch’s core brands in the first quarter of 2008.

An attractive premium
The last time Anheuser-Busch’s stock traded at what I’ll call a “normal” price was May 22 of this year, when the stock closed at $52.58. The day before, The Financial Times had reported that InBev was announcing an offer. In my opinion, this is as good a basis as any from which to determine the premium that InBev’s $65 per share represents, and it is about 24%.

If Anheuser-Busch were to maintain the total return of the past five years over the next five years, shareholders still holding shares at the end of 2012 would still not have realized a 24% total return. Yes, even with compounding.

What has changed?
According to the Anheuser-Busch board, two simple words are responsible for this new perspective: “Blue Ocean.” Yes, the company that has failed to deliver decent returns for shareholders has suddenly seen the light, and it now has a strategic plan to cut $1 billion in cumulative costs by the end of 2010. Why is this suddenly possible? Because the company is prepared to “break from a conservative culture,” leading it to the “Blue Ocean,” which is away from shore and in the deep waters. (This is actual imagery used by the CEO in the conference call. I am not making this up.)

I have a couple of problems with this. First, this break from a conservative culture is too late. If it had done this 10 years ago, Anheuser-Busch would be the hunter rather than the prey right now. Second, the most obvious criticism of any restructuring or cost-cutting plan is that it entails execution risk. Anheuser-Busch hasn’t just said that this program has risk – it’s intentionally courting it, with a metaphor and everything. This makes a guaranteed cash payment seem all the more attractive.

The company claims that its cost-cutting plan is feasible because its 30,000 employees are acting more like owners every day, and have been empowered by this new philosophy. Was this really the best management could come up with? Oil’s through the roof and the cost of virtually every commodity A-B uses in production is increasing, but a sense of empowerment will overcome basic economics -- while increasing media spending 15% in 2008? And by the way, management told us, gross margins actually declined in the second quarter this year. But no worries -- when “Blue Ocean” kicks in, all will be right in the world of beer. And A-B stock will shoot way past $65.

Good luck.

The final straw
If you enjoy a good laugh, I suggest checking out a recent proxy filing from A-B. The company recaps a conference call with analysts, and the evasiveness of the answers is obvious. If you read the given answers carefully, it’s clear that many of the questions aren’t really answered at all. In particular, management completely evaded this question: “If we weren’t successful at cutting costs before, how can we now?”

The given answer explained that the company has effectively contained costs comparatively to brewers like Boston Beer (NYSE: SAM  ) and Constellation Brands (NYSE: STZ  ) . To me, that’s like saying to your parents, “Yeah, I got a D in math, but my best friend got an F, so that’s pretty good.” Management goes on to explain how their No. 2 and No. 3 U.S. competitors are merging (that would be SABMiller (OTC: SBMRY) and Molson Coors (NYSE: TAP  ) ), and that global competitors with broad geographic footprints have their own cost advantages, as well. In other words, the competitive landscape at home is getting tougher, and international brewers -- like InBev -- have cost advantages. Doesn’t this really speak to why A-B should sell itself? It certainly does not address why the company will be able to cut costs now when it couldn’t before.

Goodbye, Anheuser-Busch
I think the Anheuser-Busch board is badly overplaying their hand. They still seem to think that this is 1995 and they are the 800-pound gorilla of the brewing world, but they are now little more than an oversized orangutan. If this goes hostile at $65 a share, I think there is a very good chance that shareholders will accept the offer. If the board plays ball and simply demands a higher price -- without the current blustery vagueness that insinuates that their iconic brands are priceless and any attempt to buy them is vulgar effrontery -- then they might even be able to squeeze a couple of extra bucks per share out of InBev.

Otherwise, sit back, crack open a tallboy, and enjoy a slew of shareholder lawsuits and corporate hostility. This is what happens when corporations stop being nice and start being real.

Related Foolishness:

Anheuser-Busch is an Inside Value selection. SABMiller has been recommended by Global Gains. The Motley Fool’s newsletters manage to be both nice and real during free 30-day trials.

Fool contributor Matthew Reilly does not own shares in any of the companies mentioned and hates vague effrontery and all that it entails. The Fool’s disclosure policy is not for sale at any price.


Read/Post Comments (9) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 03, 2008, at 2:51 PM, Kidder1178 wrote:

    Haven't you Fools been pushing this stock for years now? Guess the Fools were fooled.

  • Report this Comment On July 03, 2008, at 3:48 PM, birdman123 wrote:

    Obviously YOU have never managed a highly successful billion dollar company such as A-B. People who do not know what they are talking about should keep their mouth SHUT! You do not have a clue as to the success A-B historically has. Either you are in InBev's pocket or just plain stupid!!!!

  • Report this Comment On July 03, 2008, at 4:34 PM, john814 wrote:

    I agree with birdman123. I'll take option number 2!

  • Report this Comment On July 03, 2008, at 5:53 PM, csmale wrote:

    These are the same fools that said not to buy bud stock back in april. Whats the stock worth now? $10.00 more a share and going up !! Good advice fools!!

  • Report this Comment On July 03, 2008, at 9:05 PM, weiwentg wrote:

    I'm not sure if this is the same Matthew Reilly who used to cover Anheuser for Morningstar. however, the thesis was that despite the competition, and the mispositioning of its brands, the company was generating a lot of free cash flow. it was also starting to reposition into craft beers.

    however, the impact from craft beers is not large, and Reilly or his namesake still maintained that Anheuser's cost structure was high; even if you eliminated all the fat, their fixed costs are considerable.

    and so, the offer by InBev is likely the best way to maximize value. by selling Budweiser on InBev's international distribution network, InBev would significantly increase Anheuser's revenue.

    so, certainly, the market had been undervaluing Anheuser for some time. it wasn't the highest return stock, but the risk involved was rather low. people are going to keep drinking Bud - I think it tastes like water, but most Americans seem to disagree. however, both theses are correct: you could have bought around the $40s and gained about $15 a share, but $65 a share is the best you're going to get.

  • Report this Comment On July 03, 2008, at 11:30 PM, eddyt1 wrote:

    I think this article is a fine example of how the "financial wizards think". I think the author should feel guilty because it replicates the views of so many in the wall street showroom. He accuses A-B of laying dormant with it's recovery programs and guilty of refusing a perfectly ligitimate offer that InBev has so generously made. Hey Matthew, take a look at what A-B just did. Did you stop and think that this is exactly what the company wanted and received? This attempted takeover has initiated a stong outcry of support for Anheuser Busch, who has not only mixed it up with a global power but it has made them sweat out a hefty 50 million and whose only recourse is to persuade stockholders to yank the board of directors . I think you are wrong, the Blue Ocean plan was written long before the InBev offer and A-B played this trump card to perfection. The stock has been sitting around 62.00 for almost 2 weeks now. I would have thought smart investers would have sold after the A-B rejection? I honesly think investers can't help but admire August and his board for standing firm and believing in it's product and it's employees. Let's support Anheuser-Busch for all it has done for this country and keep it here in the USA.

  • Report this Comment On July 04, 2008, at 7:36 PM, namdub wrote:

    Matthew, what is A-B worth, AMERICAN JOBS!

    People like you who don't know the first thing about running a company just want to make a quick buck by selling out a company. Every time you stock gurus sell out an American company to foreign investors, Americans loose their jobs.

    Not only will hard working people loose their jobs but all future dividends that A-B would have paid their stockholders will now go the foreign coffers. InBev is not offering a stock exchange its only money. So the real stockholders loose too as well as all of Americans.

  • Report this Comment On July 08, 2008, at 11:18 AM, missouriguy63052 wrote:

    namdub is 100% correct. Idiots like this author need to pack up and move to another country. How can you sit back and complain about a true ionic American company? AB is VERY good to the community and its employees. I know NO other company who offers what they do....if you know one lets hear it im all ears. Support your country, american products or get out!!!

  • Report this Comment On July 18, 2008, at 3:44 PM, 1759Dublin wrote:

    I am appalled and dismayed byt he authors presumption that the value of A-B can simply be calculated by the share price of its stock. If this were the case then there would be no such things as "Hidden Gems" or "Value Investing". If the author would have us believe the company, before the InBev bid, was only valued at $52.58 why on earth would they propose to pay a 24% premium? Why because InBev values A-B well above $65 per share. This is proven because they have already upped the ante. It seems A-B was able to squeeze a few more Euro's from InBev. Stock value only values the company at what Wall Street and speculators think it should be valued at, not the real intrinsic value the company has. I wonder what Warren would have valued A-B at?

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