Reference no: EM131146769

CASE 4

InBev and the Anheuser-Busch Acquisition

Jorge Paulo Lemann was born in Brazil in 1939 to Swiss immigrants. Mr. Lemann, a 1961 Harvard College graduate and world-ranked tennis player, was Swiss national tennis champion in 1962 and the Brazilian national champion five times between 1967 and 1976.1 Additionally, in 1971 Mr. Lemann founded Banco de InvestimentosGarantia SA. Carlos Sicupira and Marcel Telles joined Garantia, eventually became partners at the firm, and the three of them grew Garantia into Brazil's most presti- gious investment bank.

In 1989, Mr. Lemann, Mr. Sicupira, and Mr. Telles gained control of CopanhiaCerve- jaria Brahma, one of Brazil's two largest brewers, and Mr. Telles became the brewer's CEO. Mr. Telles, in collaboration with his partners, eliminated company cars, luxu- rious offices, and the executive dining room. He also introduced incentive perfor- mance systems throughout the firm. In 1998, following heavy trading losses from the Asian financial crises, the three partners sold their investment bank to CreditSuisse for $675 million. The following year, however, Brahma acquired brewer Companhia Antarctica Paulista in Brazil's largest-ever corporate takeover. The combined firm, renamed AmBev, controlled 70% of the Brazilian beer market.

In 2004, InterBrew, a Belgium brewery that ranked as the second-largest beer com- pany in the world, acquired AmBev, the fifth-largest brewing company in the world. The combined firm, renamed InBev, and headquartered in Belgium, surpassed Anheuser-Busch to become the world's largest brewing company. Although Inter- Brew was the acquirer, Mr. Lemann, Mr. Sicupira, and Mr. Telles retained a significant equity interest in InBev. Mr. Carlos Brito, a Brazilian citizen and Stanford MBA, had served as AmBev's CEO since 2003. He was named InBev's North American zone president. In 2005, when Mr. Lemann, Mr. Sicupira, and Mr. Telles gained a control- ling interest in InBev, Mr. Brito was named InBev's president.

InBev Acquires Anheuser-Busch

In early June 2008, InBev made an unsolicited $46.3 billion bid for Anheuser-Busch ($65 per share). InBev had a reputation as an innovative marketer and cost-cutter; Anheuser-Busch had a paternalistic reputation. Employees-from brewery workers to executives-were highly compensated, and each employee received two free cases of Anheuser-Busch products each month. Anheuser-Busch had one of the strongest distribution networks of any industry in the world. Anheuser-Busch distributorswere among the wealthiest business owners in their respective regions, and both Anheuser-Busch and its distributors were widely known for their charitable and civic contributions. Anheuser-Busch also had many of the most popular and innovative advertisements in the United States. Anheuser-Busch was usually the Super Bowl's heaviest advertiser, and those advertisements were among the most popular.

If InBev acquired Anheuser-Busch, there was little question it would cut costs. The only question was whether InBev would overpay, given the worldwide recession. After a series of press releases from Anheuser-Busch arguing the price was too low and from InBev arguing the price was fair, the two firms issued a July 14, 2008, joint press release announcing that Anheuser-Busch agreed to be acquired for $70 per share in cash, or $52 billion.

Many analysts considered the price too high. Anheuser-Busch's 2007 net income before tax was only $2.42 billion (Exhibit 1) and its 2007 cash flow from operations only $2.94 billion (Exhibit 2). However, the $2.42 before tax income in Exhibit 1 includes "Equity income net of tax" of $662.4 million, primarily from Anheuser- Busch's 50% ownership in Mexican brewer GrupoModelo, producers of Corona beer. Anheuser-Busch's 2007 10-K reported that interest was worth approximately $9 billion. Anheuser-Busch also owned two divisions that InBev could sell: Busch Entertainment division, owner of Sea World and Busch Gardens, and a producer of metal beverage containers (Exhibit 3). In addition, Anheuser-Busch owned several smaller breweries that InBev could sell.

InBev's Rights Offering

Exhibits 4, 5, and 6 show InBev's income statement, balance sheet, and statement of cash flows from its 2007 annual report (in Euros). To help pay for the acquisition, InBev announced in a 720-page prospectus dated November 23, 2008, that it would sell additional shares through a rights offering. Each shareholder of record as at the closing of Euronext Brussels on November 24, 2008 (the record date) would receive one right for each share owned. On that date, InBev's approximate share price was EUR 20.

For every five rights, shareholders were granted the right to purchase eight additional shares of InBev at a price of EUR 6.45 per new share. As of December 31, 2007, InBev had 615,043,509 shares outstanding, which would have allowed shareholders to purchase 984,069,614 additional shares at a total cost of 6,347,249,013 euro. In its 2008 annual report, InBev disclosed that on December 16, 2008, it issued 986,109,272 new Anheuser-Busch InBev shares. In exchange, InBev received aggregate consideration of $6.36 billion euro (virtually all rights holders exchanged their rights, and the required cash payment, for additional Anheuser-Busch InBev shares).

Anheuser-Busch InBev Cost Cuts

Exhibit 7 shows Anheuser-Busch InBev's reporting of the Anheuser-Busch acquisi- tion. Anheuser-Busch InBev almost immediately began making changes at Anheuser- Busch. On January 14, 2009, it sent a letter to its suppliers stating that on February 1, 2009, it would extend payment terms from 30 days to 120 days. That letter asked sup- pliers to notify Anheuser-Busch InBev in writing if they were unable to conduct busi- ness under the new terms. Specifically, the letter stated the following: "If you are not able to work with the change in payment terms, we may have to consider an alterna- tive supplier. . . . While we recognize these terms may be difficult for some of oursuppliers, they are consistent with standards used by other multinational companies, and we hope we will be able to continue working together."

In February, 2009, the St. Louis Post Dispatch reported that Anheuser-Busch would no longer support a St. Louis American Legion post of World War II veterans. Long- time Anheuser-Busch CEO August A. Busch had been a member of that post, and each September 29, the date of his death, a rifle guard lays a wreath at his grave. Anheuser-Busch also replaced luxurious executive offices with cubicles, cut salaries, and began a series of firmwide layoffs.

Emerson, a major St. Louis corporation that supplies equipment to the brewing industry, issued an internal memo dated April 14, 2009. That memo stated that Emerson would no longer buy Anheuser-Busch products. It also mentioned that "numerous St. Louis not-for-profits have lost all or most of their Anheuser-Busch funding-United Way, Boy Scouts, Girl Scouts, and the list goes on!" Anheuser- Busch President Dave Peacock said his company was "surprised and disappointed" about Emerson's decision and called the memo an "inaccurate portrayal of us as a company. . . .We are continuing to make substantial contributions to St. Louis and elsewhere. . . . In February, we announced a $2.5 million donation to the University of Missouri-St. Louis (and $2 million to the St. Louis United Way)."

In April 2009, Anheuser-Busch InBev notified NBC it would cut advertising spending for the Olympic broadcasts by about half and would no longer remain the exclusive beer advertiser during the Olympics.

Since Prohibition, U.S. states have generally required a three-tier alcoholic bever- age distribution system. In most instances, alcohol producers (brewers, distillers, and wineries), alcohol distributors, and alcohol retailers must be separately owned (in some states the state acts as the distributor or the retailer). Those rules protect small distributors and retailers from being driven out of business by large brewers or distillers. On March 10, 2010, Anheuser-Busch InBev sued the Illinois Liquor Control Commission for rejecting its plan to buy the 70% of City Beverage, a Chicago-based Anheuser-Busch distributor, it does not now own. In its suit, Anheuser-Busch InBev argued that the Illinois rule violates the U.S. Constitution's Commerce Clause by lim- iting interstate commerce. The brewer labeled the rule a form of "protectionism" designed to help local companies at the expense of those based outside the state.

Anheuser-Busch InBev Asset Sales

During 2009, Anheuser-Busch InBev issued several press releases announcing asset sales. On May 7, 2009, Anheuser-Busch InBev announced it agreed to sell Oriental Brewery, South Korea's second largest brewery, to an affiliate of Kohlberg Kravis Roberts for US$1.8 billion (InBev owned Oriental Brewery prior to its acquisitionof Anheuser-Busch).12 On July 1, 2009, Anheuser-Busch InBev announced it would sell four metal beverage container manufacturing plants to Ball Corporation for US$577 million. On October 7, 2009, it announced it would sell Busch Entertainment Corporation to Blackstone Capital Partners V L.P. for a cash payment of US$2.3 billion and a right to participate in Blackstone's return on its initial investment, capped at US$400 million. On October 15, 2009, Anheuser-Busch InBev announced it would sell its Central European Operations to CVC Capital Partners for an enterprise value of approximately US$2.231 billion and an additional right to participate in CVC's return on its capital estimated to be as much as US$800 million, contingent on CVC's return on its initial investment. Exhibit 8 summarizes those disposals.

Anheuser-Busch InBev 2009

Many analysts believed InBev overpaid for Anheuser-Busch, particularly given the serious recession at the time of the acquisition. Although the recession continued for at least a year after the acquisition, through asset sales, cost cutting, extended payment terms, and other actions, Anheuser-Busch InBev avoided selling its 50% interest in GrupoModelo, Mexico's dominant brewer and a major brand through- out the United States. On March 9, 2009, broker Evolution Securities speculated that Anheuser-Busch InBev might acquire the remaining 50% interest of Grupo Model for $10.8 billion.

Exhibits 9, 10, and 11 are Anheuser-Busch InBev's 2009 income statement, balance sheet, and statement of cash flows. For the year ending December 31, 2009, InBev changed its financial reporting units from euros to U.S. dollars and its functional cur- rency from the euro to U.S. dollars because its largest segment is in the United States. However, because it is headquartered in Belgium, the firm follows International Financial Reporting Standards (IFRS), not U.S. GAAP.

THE ANSWER FOR EACH OF THE 2 QUESTIONS NEED TO BE AT LEAST 1 PAGE. PLEASE ALSO USE THE INTERNET AS A REFERENCE.
WEEK 4 DISCUSSION

1. From Case 4, imagine you are the consultant who has to make the recommendation on whether or not to purchase Anheuser-Busch. Determine the rate of return you could expect from your investment and the method you would use to evaluate the investment decision. Assess the disadvantages and advantages of each investment method located in Chapter 4, and choose the one that would provide the most accurate measure for your anticipated rate of return requirement. Justify your recommendation.

2. Capital budgeting decisions are among the most important decisions facing business entities. Suggest specific milestones needed to evaluate the performance of capital projects, and suggest some ways to hold managers accountable for spending overruns. Recommend when capital projects should be abandoned due to subsequent cost overruns. Support your position.