The bid for BUD: Morgan Stanley's Pecoriello sees higher price, Wachovia's Feeney dwells on difficulties

By Paul A. Harris

St. Louis, June 13 - Although one equities analyst from the food and beverage sector reminded Prospect News that "it's still the early innings," the tempest surrounding the bid for Anheuser-Busch gathered strength on Friday.

Belgian brewer InBev NV's $65 per share bid for St. Louis-based Anheuser-Busch Cos., Inc. came late Wednesday.

Since that time the Wall Street Journal has reported that Anheuser-Busch has been in talks with Mexico's Grupo Modelo, SA de CV, a brewer in which it holds a 50% stake.

Speculation as to what the companies might have been talking about ranges from Anheuser-Busch possibly selling its stake in order to raise money for a going private transaction, to an out-and-out acquisition of Modelo by Anheuser-Busch, although the latter scenario has been deemed implausible due to reticence on the part of the families which control the Mexican brewer.

On Friday afternoon the plot thickened when CNBC's David Faber reported that InBev approached Modelo about a potential deal.

Faber further reported that InBev told Modelo it would be amenable to do "whatever Modelo wants," presumably to prevent Anheuser-Busch from putting itself out of InBev's reach by means of an out-and-out Anheuser-Busch-Modelo merger.

And the forces in St. Louis and the State of Missouri continue to rail against the proposed acquisition because of the potential loss of jobs that the deal potentially represents.

Joining the fray is Missouri senator Christopher "Kit" Bond, according to a special situations equities analyst, who said that Bond sent to letters to U.S. attorney general Michael Mukasey and Federal Trade Commission chairman William Kovacic, requesting that they scrutinize the InBev proposal.

'Higher price' scenario

In a Friday note to investors, Bill Pecoriello, an equities analyst for Morgan Stanley Research North America, commented that Anheuser-Busch will not quietly yield to the InBev bid. And if it does agree to be acquired it will likely command a higher price.

"The two conclusions that we walk away with in the first 24 hours since Inbev's buyout offer to Anheuser-Busch are (1) BUD will not go quietly and if the reported Modelo talks fail, we see BUD looking to other defenses before agreeing to a buyout and (2) if BUD ultimately agrees to a buyout, we believe it will look for a higher price - at least $70 per share.

"On BUD's method of calculating EBITDA (adding back the pre-tax equity income), and the method we would presume that BUD would use to evaluate an offer, InBev is offering roughly 11.4x trailing EBITDA, below the 11.9x [Heineken NV] recently paid for mature assets in Europe. A similar multiple would imply a takeout price of $70."

'No deal' scenario

Jonathan Feeney, food and beverage stocks analyst for Wachovia Capital Markets, commented in a Friday note to investors that InBev would be hard pressed to acquire a fully combined Anheuser-Busch-Modelo entity.

"Given the large amount of debt InBev had to find commitments for in order to finance its bid for BUD, a tie-up with Modelo would put InBev's desire for BUD well out of reach in our view.

"While just about anything has been proven possible during this global brewer consolidation saga, if the reports are true, we believe it's a strong sign of BUD's perspective on InBev's $65 bid, and the improbability of a friendly deal. It is reported that BUD approached Modelo shortly after reports surfaced of InBev's bid.

"We continue to believe a hostile deal would be difficult (distributor relationships/financing/regulatory), and given the reported willingness of SABMiller to negotiate a merger with InBev, and the higher likelihood of a Modelo-BUD tie-up (BUD already owns 50%); we'd be surprised to see a BUD-InBev tie up in the coming year."

Softer on Friday

A special situations equities analyst, speaking on background late Friday afternoon, said that a belief among investors that Anheuser-Busch shares would command a price higher than the $65 bid that InBev put forward late Wednesday was not apparent in Friday trading.

After rallying 5.23% on Thursday, the first full session following news of the InBev bid, Anheuser-Busch shares (NYSE: BUD) lost nearly half a percent on Friday, closing at $61.21, down $0.28 or 0.46%.

InBev (EBR: INB) fell 1.55% on Friday, closing at €49.43, down €0.78.

Yahoo! still at a premium

On Thursday Google Inc. announced that it had reached an agreement that gives Yahoo! Inc. the ability to use Google's search and contextual advertising technology through its AdSense for Search and AdSense for Content advertising programs.

Under the agreement, Yahoo! has the option to display Google ads alongside its own natural search results in the U.S. and Canada. In addition, Yahoo! can serve contextually targeted ads on its U.S. and Canadian web properties as well as on its current publisher partner sites. Yahoo will continue to operate its own search engine, web properties and advertising services.

In addition, Yahoo! and Google agreed to enable interoperability between their respective instant messaging services bringing easier and broader communication to users.

On Friday a special situations analyst noted that the Google-Yahoo ad-search deal had a $250 million change of control termination fee for the first two years.

The source also said that there are reports that Yahoo! investors have not totally given up on a possible deal with Microsoft Corp., even though Microsoft said that it is no longer interested in acquiring Yahoo! at the $33 original bid.

On Friday Yahoo! (Nasdaq: YHOO) shares closed at $23.47, down 0.21%, or a nickel on the day.

The special situations analyst retraced the trajectory of those shares in the wake of the Microsoft $33 per share bid, and recalled that in the wake of that bid they rose to nearly $30.

The source added that Friday's closing price still represents an approximately 18% premium over Yahoo's $19.05 share price just before the Microsoft bid was announced.

The analyst chalked that premium up to the Microsoft-Google deal.

Meanwhile on Friday shares of Microsoft (Nasdaq: MSFT) gained 2.94%, or $0.83, to close at $29.07.

Google (Nasdaq: GOOG) gained 3.36%, or $18.56, to close at $571.51.

Friday's situations too place against the backdrop of a substantial rally in U.S. equity prices.

All three major U.S. stock indexes posted greater-than 1% gains.

The outperformer was the Nasdaq which closed 2.09% higher on Friday, at 2,454.50, up 50.15 points.

The S&P 500 was up an even 1.5%, closing at 1,360.03, 20.16 points higher on the day.

The Dow Jones Industrial Average advanced 1.37%, or 165.77 points, to close at 12,307.35.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.