'King of Beers's Realm Is Shrinking
Anheuser's Failed Deals,
Declining Budweiser Share
May Leave a Bitter Taste
February 4, 2006; Page B16
It's good to be king -- except when your realm is shrinking. That's beginning to dawn at Anheuser-Busch Cos., brewer of the self-proclaimed King of Beers, Budweiser. Bud sat out the industry's recent mergers-and-acquisitions frenzy because it didn't like the prices rivals paid around the globe. Now it's paying a high price for its lack of geographical diversification.
The U.S. beer market -- where Bud gets 80% of its revenue -- is a kingdom in decline. Consumers are moving to spirits, wine and craft brews. Meantime, Bud's biggest rival, SABMiller PLC, was rejuvenated when it was unleashed from Altria Group Inc. Bud's market share fell below 49% last year despite an effort to gin up volumes by cutting prices. Raw materials costs rose, leading to a 22% plunge in operating profit.
What's Bud to do? It could try to grow organically abroad while fighting domestic rivals and imports like Heineken NV at home. But its U.S. dominance means it would take Herculean efforts to offset even modest slippage at home. Bud could buy smaller brands such as Holland's Grolsch NV and shunt them through its distribution system. But it faces fierce competition for these assets, as its failure to nab China's Fujian Sedrin highlights.
That leaves a transformational deal. This, too, is complicated as most of the desirable partners -- Heineken, Grupo Modelo, Carlsberg AS and SABMiller -- are either off-limits for antitrust reasons or controlled by families unwilling to sell.
That leaves Belgium's InBev SA. While Bud has failed to expand much abroad, InBev has made few inroads into the U.S. Moreover, InBev is relatively affordable. The hitch is that Bud's $32 billion market value is only about 10% higher than InBev's.
That means any deal would probably need to be structured as a merger. Since most InBev stock is held by a few Brazilian and Belgian families, that would dilute the Busch family, which owns 3% of the stock but exerts control over the board, which August Busch III chairs.
Given Mr. Busch's past opposition to sharing control, this presents a hurdle. It was the reason Bud failed to acquire AmBev, the Brazilian brewer that merged with InterBrew to create InBev. A deal with InBev may be the best available M&A solution to Bud's problems. But shareholders are more likely to endure a long, steady decline before they see the Busch family tap this particular option.
Capex Myth
Many economists are expecting U.S. personal consumption to slow as the housing market cools. But they argue that any drag on growth should be offset by rising capital expenditures by business. They point to the huge cash pile amassed by corporations to justify their claims. On inspection, the pile isn't so impressive.
Companies in the S&P 1500 (a combination of S&P's small-cap, midcap and large-cap indexes) held $2.5 trillion in cash last year, Banc of America Securities estimates. Of this, some $1.6 trillion was held by financial corporations, which are unlikely candidates to generate an investment boom. The second largest slug, $260 billion, was held by tech companies.
The third biggest cash pile is owned by industrial giants, such as General Motors Corp. But these companies also have the largest underfunded liabilities from employee-benefit plans. In a sense, industrial America is GM writ large.
The off-balance-sheet liabilities of U.S. corporations can be roughly calculated. First, there is the $354 billion aggregate shortfall in pension funding reported to the Pension Benefits Guarantee Corp. Then there are other post-employment benefits, such as health-care costs, which owing to an accounting change will soon have to be reported as liabilities. S&P estimates these liabilities are underfunded by $300 billion.
Finally, there's the cost of stock-option plans outstanding, which Banc of America calculates at around $440 billion. These off-balance-sheet liabilities amount to some $1.1 trillion. Subtract the $1.6 trillion cash held by financial companies and the corporate money mountain becomes a molehill.
Businesses could borrow to finance investment. But it's not clear there's any need. For a start, U.S. business spending over the past couple of years has been rising at a healthy 8%-10% annual clip, says Ned Davis Research. Although U.S. capacity utilization has picked up, there's no shortage of supply elsewhere. After the Chinese boom is taken into account, global business investment reached a record level last year, observes Morgan Stanley's chief economist Stephen Roach. Don't expect a U.S. capital-spending splurge.
Stock-Exchange Dance
The trans-Atlantic mating dance is in full swing. The Nasdaq Stock Market and New York Stock Exchange have telegraphed their interest in playing a role in the consolidation of European stock markets. The trouble is both have their hands tied. Nasdaq is digesting its acquisition of the INET trading platform that left it with $1.2 billion in debt, some of which it may pay down with a pending stock offering. The Big Board must close its Archipelago merger before embarking on another hunt.
This helps explain their near-public displays of affection. Neither wants to be left in the lurch as German exchange operator Deutsche Börse AG and Euronext NV engage in talks and Macquarie Bank Ltd., of Australia desperately woos London Stock Exchange PLC.
So who has the best shot at a European deal? On the face of it, the NYSE looks the stronger candidate. It's larger, has no debt, and could slash some $250 million of costs in a merger with any of the big three European markets. Its smaller size may make it a more politically palatable partner in France, Germany, and even the U.K. The dance has just begun.
Anheuser's Failed Deals,
Declining Budweiser Share
May Leave a Bitter Taste
February 4, 2006; Page B16
It's good to be king -- except when your realm is shrinking. That's beginning to dawn at Anheuser-Busch Cos., brewer of the self-proclaimed King of Beers, Budweiser. Bud sat out the industry's recent mergers-and-acquisitions frenzy because it didn't like the prices rivals paid around the globe. Now it's paying a high price for its lack of geographical diversification.
The U.S. beer market -- where Bud gets 80% of its revenue -- is a kingdom in decline. Consumers are moving to spirits, wine and craft brews. Meantime, Bud's biggest rival, SABMiller PLC, was rejuvenated when it was unleashed from Altria Group Inc. Bud's market share fell below 49% last year despite an effort to gin up volumes by cutting prices. Raw materials costs rose, leading to a 22% plunge in operating profit.
What's Bud to do? It could try to grow organically abroad while fighting domestic rivals and imports like Heineken NV at home. But its U.S. dominance means it would take Herculean efforts to offset even modest slippage at home. Bud could buy smaller brands such as Holland's Grolsch NV and shunt them through its distribution system. But it faces fierce competition for these assets, as its failure to nab China's Fujian Sedrin highlights.
That leaves a transformational deal. This, too, is complicated as most of the desirable partners -- Heineken, Grupo Modelo, Carlsberg AS and SABMiller -- are either off-limits for antitrust reasons or controlled by families unwilling to sell.
That leaves Belgium's InBev SA. While Bud has failed to expand much abroad, InBev has made few inroads into the U.S. Moreover, InBev is relatively affordable. The hitch is that Bud's $32 billion market value is only about 10% higher than InBev's.
That means any deal would probably need to be structured as a merger. Since most InBev stock is held by a few Brazilian and Belgian families, that would dilute the Busch family, which owns 3% of the stock but exerts control over the board, which August Busch III chairs.
Given Mr. Busch's past opposition to sharing control, this presents a hurdle. It was the reason Bud failed to acquire AmBev, the Brazilian brewer that merged with InterBrew to create InBev. A deal with InBev may be the best available M&A solution to Bud's problems. But shareholders are more likely to endure a long, steady decline before they see the Busch family tap this particular option.
Capex Myth
Many economists are expecting U.S. personal consumption to slow as the housing market cools. But they argue that any drag on growth should be offset by rising capital expenditures by business. They point to the huge cash pile amassed by corporations to justify their claims. On inspection, the pile isn't so impressive.
Companies in the S&P 1500 (a combination of S&P's small-cap, midcap and large-cap indexes) held $2.5 trillion in cash last year, Banc of America Securities estimates. Of this, some $1.6 trillion was held by financial corporations, which are unlikely candidates to generate an investment boom. The second largest slug, $260 billion, was held by tech companies.
The third biggest cash pile is owned by industrial giants, such as General Motors Corp. But these companies also have the largest underfunded liabilities from employee-benefit plans. In a sense, industrial America is GM writ large.
The off-balance-sheet liabilities of U.S. corporations can be roughly calculated. First, there is the $354 billion aggregate shortfall in pension funding reported to the Pension Benefits Guarantee Corp. Then there are other post-employment benefits, such as health-care costs, which owing to an accounting change will soon have to be reported as liabilities. S&P estimates these liabilities are underfunded by $300 billion.
Finally, there's the cost of stock-option plans outstanding, which Banc of America calculates at around $440 billion. These off-balance-sheet liabilities amount to some $1.1 trillion. Subtract the $1.6 trillion cash held by financial companies and the corporate money mountain becomes a molehill.
Businesses could borrow to finance investment. But it's not clear there's any need. For a start, U.S. business spending over the past couple of years has been rising at a healthy 8%-10% annual clip, says Ned Davis Research. Although U.S. capacity utilization has picked up, there's no shortage of supply elsewhere. After the Chinese boom is taken into account, global business investment reached a record level last year, observes Morgan Stanley's chief economist Stephen Roach. Don't expect a U.S. capital-spending splurge.
Stock-Exchange Dance
The trans-Atlantic mating dance is in full swing. The Nasdaq Stock Market and New York Stock Exchange have telegraphed their interest in playing a role in the consolidation of European stock markets. The trouble is both have their hands tied. Nasdaq is digesting its acquisition of the INET trading platform that left it with $1.2 billion in debt, some of which it may pay down with a pending stock offering. The Big Board must close its Archipelago merger before embarking on another hunt.
This helps explain their near-public displays of affection. Neither wants to be left in the lurch as German exchange operator Deutsche Börse AG and Euronext NV engage in talks and Macquarie Bank Ltd., of Australia desperately woos London Stock Exchange PLC.
So who has the best shot at a European deal? On the face of it, the NYSE looks the stronger candidate. It's larger, has no debt, and could slash some $250 million of costs in a merger with any of the big three European markets. Its smaller size may make it a more politically palatable partner in France, Germany, and even the U.K. The dance has just begun.
NOT!!
