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.
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