Signals massive strike to oppose cost savingsInBev's $52 billion pact to swallow up Anheuser-Busch Cos. may be a done deal on paper, but there are likely to be plenty of bruised feelings before the acquisition closes -- and some major integration hurdles to overcome after that.
Late Sunday, the two companies announced agreement on the deal. Initial opposition from St. Louis-based Anheuser-Busch's board evaporated after InBev, based in Belgium, raised its all-cash offer to $70 a share from the previous $65.
InBev has promised to keep all of Anheuser-Busch's U.S. breweries open while basing its North American headquarters in St. Louis and making Budweiser its "global flagship" brand. But the sweetened offer also is likely to mean that InBev, which is known for aggressive cost cutting, will have to squeeze even harder than first expected.
In their joint press release announcing the deal, the two companies vowed to find $1.5 billion in "synergies" over the first three years -- roughly 50% more than was envisioned in the restructuring plan Anheuser-Busch unveiled during the bidding process.
"At this higher price, InBev is going to have to work a lot harder and have a larger focus on cost-cutting," said Ann Gilpin, an analyst with Morningstar. And considering that the two companies have virtually no overlap in the U.S. market and precious little elsewhere, "there are not a whole lot of opportunities for synergies," she added.
InBev "thinks it can get some efficiencies in cost of goods sold and other overhead," Gilpin said. However, "that could lead to some integration problems as the corporate cultures are different. And, even though the deal is finally done, the employees and most of St. Louis are not cheering for InBev."
That's something of an understatement.
The deal has set off howls of protest in the Gateway City, where Anheuser-Busch is one of the largest employers, taxpayers and charitable donors. Missouri politicians, including the state's governor and two U.S. senators, have all deplored this American icon's falling into foreign hands.
While they are unlikely to be able to do much more than protest the deal, slated to close by the end of the year, they might be able to twist enough arms to slow it down.
Aggrieved constituencies
Sen. Christopher Bond, R-Mo., has asked the Federal Trade Commission and the Justice Department to carefully scrutinize any deal, writing that it is "clear that the local sentiment is adamantly opposed to yielding control and threatening operations that have been beneficial to consumers, workers, American communities, and shareholders alike."
Or, in other words, as Bond recently told reporters: "InBev buying Anheuser-Busch is as popular in St. Louis as $4 gas."
Meanwhile, Sen. Claire McCaskill, D-Mo., one of the more outspoken opponents of the deal, appeared resigned to its outcome.
"I'm disappointed," she said in a written statement. "Anheuser-Busch's Missouri work force will continue to make the company one of the best in the world and I am going to do everything I can to make this new arrangement work for Missouri and the millions of Americans who love Budweiser."
And in a shot at the Bush administration and a Congress that was controlled by Republicans prior to 2006, she added, "We need to remember that InBev could afford this All-American company because of the weak dollar created by the economic policies of the last seven years."
Unions could also make any integration into a greater headache by holding InBev's feet to the fire on its pledges.
Jack Cipriani, director of the Teamsters Soft Drink and Brewery Division, applauded "InBev's pledge not to close breweries or lay off employees," but he said "the structure of this sale raises pressing financial questions about InBev's ability to keep those promises."
The Teamsters represent more than 7,000 Anheuser-Busch employees. Cipriani wants to talk with InBev about how its will generate the cost savings to help cover the massive amount of debt it's assuming in executing the deal, he said.
"InBev claims that economies of scale and other savings from merging the two companies' operations will generate the money it needs to service this huge debt, but they haven't said where those savings would come from." When the company moved into Canada, its "first moves were brewery closures and attempted layoffs," Cipriani said. InBev acquired Labatt, a Canadian brand, in 1995.
"InBev has yet to show it can respect and value workers once it takes over a company," he said. "The Teamsters will hold InBev to its promises not to lay off A-B employees and not to close breweries."
Bill Bates, a mergers-and-acquisitions lawyer at King & Spalding in New York, said the kind of promises InBev is making are not unusual, and, while "there are not a lot of instances where companies reneged," they are far from ironclad.
"There might be some assurances written into the merger agreement, although it is hard to enforce those after the deal is done," Bates said.
Another possible spanner in the works could be thrown by Mexico's Modelo, which is half-owned by Anheuser-Busch. On Monday, that company said its agreement with Anheuser-Busch "was carefully constructed to ensure we have a definitive say in who our partner is" and that it is confident that it "gives us the right to decide whether or not to consent to the potential acquisition."
Still, "we have a great deal of respect for InBev and look forward to continuing our discussions with them and hope to find a resolution that meets the needs of both companies and their stakeholders," Modelo said.
Perhaps the greatest risk to a successful close -- and it does seem a large one at this juncture -- is the financing.
Should the market crunch continue or the U.S. dollar strengthen appreciably, some of InBev's bankers could shy away or at least impose tougher terms before completing the transaction.
"I think it will go through," said Morningstar's Gilpin, "but anything could happen. The biggest potential risk is if the financing falls apart. There is a lot of time for the markets to deteriorate further," which could lead InBev to have to put equity on the line -- a move that could be bad news for its own stock.
At the very least, she said, "Anheuser-Busch shareholders should be happy this is an all-cash deal."
(marketwatch.com)
