The return of the King?

Budweiser drinkers in St. Louis may end up raising a glass to one possible consequence of the current Wall Street woes: a derailing of the takeover of Anheuser-Busch by Belgian giant InBev. You can characterize the situation as betting against the spread: the difference between the price per A-B share that InBev agreed to pay - $70 - and the current price, which is falling like a rock along with the rest of the market. At the St. Louis Post-Dispatch, financial reporter David Nicklaus blogs thusly:

Yesterday, the BUD spread was almost $9. This morning, it’s $10.50, the widest it’s been since the InBev deal was sealed in July. An investor who buys the stock today can reap a gain of 18 percent in less than two months – assuming that the deal goes through. Even as InBev puts its U.S. leadership team in place, investors are marking down the probability of those leaders actually taking control.

More from Steven Davidoff at the NY Times:

Anheuser-Busch closed on Thursday at $61. 61, a 12 percent spread on an InBev deal expected to close by year-end. The spread no doubt recognizes the fears in the market and the widening spreads on all deals (take a look at the spread on Rohm and Haas which has agreed to be acquired by Dow Chemical for another example).

It is also the product of almost constant rumors that the financing for this deal will collapse despite being syndicated to 19 banks (albeit some rather shaky ones, as well as Fortis) and with documented credit agreements in place. The Model Group arbitration no doubt throws a wrinkle in this deal, but I have to think that this possibility was disclosed by InBev on the disclosure schedules to the merger agreement and therefore any outcome there cannot provide InBev a walk right.

Banks aren’t in the mood to lend at the moment, and there’s no sign that the credit freeze will thaw soon. It remains to be seen if the financial arrangements for the takeover made by InBev will hold up.

Each party, A-B and InBev, had earlier agreed to pay the other a $1.25 billion penalty if it caused the deal to fall through. I can only assume that if InBev’s financing fails, it will have to write A-B a pretty hefty check.

As of this writing, the share price for Anheuser-Busch is even lower - $58.79 - making that spread even wider. You can be sure that they’re doing the math at InBev.

Add: The purchase price for A-B was $60.8 billion (with a ‘b’), according to TheStreet.com. InBev is financing $45 billion of that.

InBev arranged to borrow $45 billion from a syndicate of banks including Bank of Tokyo-Mitsubishi, Banco Santander, Barclays Capital, BNP Paribas, Deutsche Bank, ING Groep, JPMorgan Chase, Mizuho, Fortis Bank and the Royal Bank of Scotland.

Fortis has since been taken over by the Dutch government and the other banks are working their way through the current credit crunch, which partially explains the decline in Bud stock since mid-September. If the banks come through with the financing, Anheuser-Busch stock will likely jump back to the purchase price of $70 in a hurry.

Some of those bank names are instantly recognizable. Others are just ciphers to me, but I’m no financier. The note below, also from TheStreet.com, was obviously written before the recent share price drop:

If the acquisition goes through as planned, the Bud shares would be cashed out at $70 each, a premium of 11% from their current level around $63. On the other hand, if the deal fails, the stock could drop back to trading levels in the $50 to $55 range or lower.

The way things have been going on Wall Street, the A-B price may fall that far even if the deal doesn’t fail. This will be interesting to watch.

Late add: Michael Santoli at Barron’s says the closing of InBev’s A-B acquisitions “looks on track.”

At the moment (9:39 Central on Monday, 10/13), A-B’s share price is $62.71, rising with the tide as the markets respond favorably to various capital injections and other international actions.

Similar posts:
There goes the King
Bowing to the inevitable?
As long as they’re in a buying mood
“SaveAB.com”
The gloves come off