Anheuser-Busch: scenarios for a higher bid from InBev; Dow Chemical acquires Rohm & Haas

By Paul A. Harris

St. Louis, July 10 - Shares of Anheuser-Busch Cos., Inc. (NYSE: BUD) declined by 0.15% on Thursday, underperforming the major U.S. stock indexes, even though sources watching the deal told Prospect News that there seems to be a belief taking shape that InBev NV, which has launched a $65 per share hostile bid for Anheuser-Busch, will ultimately need to sweeten the offer.

Developments which are garnering attention include a pair of lawsuits, one filed by Inbev in Delaware Chancery Court seeking a judgment to confirm that Anheuser-Busch shareholders may remove without cause all 13 members of the company's present board, the other filed by Anheuser-Busch in the Eastern District of Missouri, essentially seeking to prevent a removal on those terms.

$71 per share scenario

Sachin Shah, special situations analyst for ICAP Securities, believes that InBev needs to raise its bid in order to get the deal done.

Last week ICAP initiated coverage of Anheuser-Busch with a "buy" recommendation and a $71 per share price target.

ICAP calculates that Anheuser-Busch shares have a $67.50 stand-alone value, but a 20% downside, to $54 per share, should the merger not materialize. Forces triggering such a non-merger slide might include selling pressure as a result of near-term challenges to fundamentals, the potential for lowered consensus estimates, as well as short-term selling as event-driven investors unwind their positions.

In a Thursday telephone interview Shah conceded that the extra $6 per share would up the acquisition price to between $50 billion and $51 billion, from the current price of between $47 billion and $48 billion.

However the ICAP analyst believes that, rocky credit markets notwithstanding, InBev, which now claims to have commitments in place for $40 billion of debt financing, can raise the extra cash.

Finance capacity

Shah recounted that on Wednesday InBev CEO Carlos Britto told the St. Louis Post-Dispatch that the financing for the $65 per share bid is in place.

In addition, Shah pointed out that last week InBev's roster of banks committed to the financing grew to 10 from eight with the addition of Bank of Tokyo Mitsubishi and Mizuho to the existing lineup: JP Morgan, Banco Santander, Barclays Capital, BNP Paribas, Deutsche Bank, Fortis Investments, ING and Royal Bank of Scotland.

He also pointed out that this list of banks is bereft of the names of several prominent U.S. investment banks whose troubled balance sheets continue to be headline news on the financial pages by dint of their aggressive bidding during the LBO craze of 2006 and early 2007.

Also, the analyst said, the recent failure of France Telecom's $41.8 billion equivalent bid for the Sweden's TeliaSonera can only add to the pool of potential capital that the financing banks could conceivably tap as they attempt to syndicate the debt backing InBev's play for Anheuser Busch.

Shah also asserted that, reassurances to its shareholders notwithstanding, InBev could ultimately elect to issue equity.

"They said they wouldn't, but the reason [InBev stock] is trading lower is because of a potential increase in the offer, and InBev shareholders' fear of equity issuance," the ICAP analyst said.

"People know that the credit markets aren't great, and that InBev will possibly have to issue equity in order to get it done, especially if it's an offer exceeding $65."

Shah also pointed out that InBev, which was formed as a result of the 2004 merger of Belgium's Interbrew with Brazil's AmBev, could tap the AmBev balance sheet, even though InBev stated in mid-June that it did not intend to do so.

The analyst also believes that InBev could generate up to $10 billion by selling Anheuser-Busch's 50% stake in Grupo Modelo SA de CV.

"InBev has the flexibility to up the offer to $71 per share," Shah insisted, adding that ICAP calculates that InBev would be able to offer up to $76 per share without being dilutive to earnings.

A sure road to $65

Earlier on Thursday a special situations equities analyst, speaking on background, pointed to a report in The Deal, in which an Anheuser Busch investor is reported to have said that, absent a firm tender offer from InBev, Anheuser-Busch shareholders would not likely support InBev's proposed board slate regardless of the outcome of the case in Delaware Chancery Court.

An analyst who covers Anheuser-Busch equity, also speaking on background, seemed to agree, saying that shareholders who believe that Anheuser-Busch has no chance of remaining independent would likely be inclined to hold out for the best offer, whereas the InBev slate is a sure road to $65.

This analyst also said that InBev, and its CEO Carlos Britta, are deeply committed to getting this deal done, having already put up $50 million of commitment fees, and added that this deep level of commitment on the part of InBev is unlikely to have escaped the notice of Anheuser-Busch shareholders.

"If you withhold support from InBev's slate you are basically putting the squeeze on InBev and Britta," the analyst reasoned.

"Failure to get this deal done may cost him his job."

On Thursday Anheuser-Busch shares lost 9 cents to close at $61.21.

InBev (EBR: INB) shares dropped by 0.96%, or €0.40 per share, to close at €41.45.

Grupo Modelo (MXK: GMODELOC) dropped 4.31% and closed at 49.75.

Dow acquires Rohm & Haas

Elsewhere on Thursday Dow Chemical Co. announced it will acquire all outstanding shares of Rohm & Haas Co. for $78 per share in cash in a transaction.

The transaction, which has been unanimously approved by the boards of both companies, remains subject to approval by Rohm & Haas shareholders, as well as regulatory approvals.

The companies are targeting completion of the transaction by early 2009.

Financing includes an equity investment by Berkshire Hathaway and the Kuwait Investment Authority in the form of convertible preferred securities for $3 billion and $1 billion respectively. Debt financing has been committed by Citigroup, Merrill Lynch and Morgan Stanley, who acted as financial advisors on the transaction.

According to a Thursday press release, Dow expects the transaction to be meaningfully accretive to earnings in the second year, with pre-tax annual cost synergies expected to be at least $800 million per year.

On Thursday shares of Rohm & Haas (NYSE: ROH) surged 65.01%, or $29.14 per share, to close at $73.97.

Shares of Dow (NYSE: DOW) fell 4.24%, or $1.44 per share, to close at $32.52 on Thursday.

GSI to acquire Excel

In other special situations news, GSI Group Inc. announced it will acquire Excel Technology Inc. for $32 per share in cash, or approximately $360 million. The offer price represents a 30.2% premium to the average Excel closing share price over the last 30 trading days.

The boards of both companies have unanimously approved the transaction.

The tender offer is expected to commence on July 23, and the transaction is expected to closed in the third quarter of this year.

GSI intends to finance the deal through a combination of available cash and external financing. GSI has definitive agreements with various investors for a $210 million private placement of senior unsecured notes and warrants.

In Thursday trading Excel Technology (Nasdaq: XLTC) jumped 36.19%, or $8.20 per share, to close at $30.86.

GSI Group (Nasdaq: GSIG) shares closed 17.32% lower at $6.42, down $1.34 on the day.

Thursday's situations took place as the major U.S. stock exchanges finished higher on the day.

The Nasdaq gained 1.03%, or 22.96 points, to close at 2,257.85.

The Dow Jones Industrial Average was up 0.73%, or 81.58, finishing at 11,229.02.

The S&P 500 posted a 0.7% gain to close at 1,253.39, 8.71 higher on the day.

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