ICAP sees 10.6% annualized return on Anheuser-Busch; financing is biggest remaining obstacle

By Paul A. Harris

St. Louis, Aug. 7 - In a Thursday note to clients, Sachin Shah, special situations analyst for ICAP Securities, and his colleagues reviewed InBev NV's acquisition of Anheuser-Busch Cos., Inc. for $70 per-share in cash, in a merger agreement struck on July 14.

Expressing confidence the merger will close by the end of the year, ICAP anticipates that in addition to the $70 per share offer from InBev, Anheuser-Busch shareholders will receive another $0.74 per share from two dividend payments, for a total $70.74 per share. The company recently increased its quarterly dividend to $0.37 from $0.33, and the merger agreement gave Anheuser-Busch the ability to increase the quarterly dividend to $0.37 up until the closing.

"We currently recommend putting on the spread at current/higher levels," Shah and his colleagues wrote Thursday. "Based on our anticipated Dec. 31, 2008 merger close, the total $70.74 per share cash consideration is equivalent to a 10.6% annualized return."

Eye to the financing

Due to the magnitude of the merger, ICAP believes that the mammoth financing, rather than antitrust approval or shareholder consent, is the biggest obstacle to a successful deal completion.

To that end they note that InBev has already secured $45 billion of loans and has a $5.6 billion bridge loan for divestments. The banks include Banco Santander, Barclays Capital, BNP Paribas, Deutsche Bank (London Branch), Fortis Bank, ING, JP Morgan, Mizuho, Bank of Tokyo-Mitsubishi and Royal Bank of Scotland.

The termination fee is $1.25 billion.

Whither Modelo?

ICAP also notes that the merger leaves InBev with Anheuser-Busch's 50.2% stake in Grupo Modelo, SA de CV.

"We do not believe that InBev currently has the financial wherewithal to acquire the remaining Grupo shares that it does not already own," Shah and company assert.

"We maintain that by 2011 InBev should have reduced its leverage to a level that would give it the ability to offer an adequate premium value for the remaining Grupo stake."

ICAP does not believe that Grupo Modelo's controlling shareholders currently want to acquire the remaining 49.8% interest because of the financing such a deal would entail.

InBev and Grupo Modelo have been in continued negotiations about allowing InBev to acquire Anheuser-Busch's 50.2% stake, Shah and company remark.

"We believe that Grupo wants assurances that it will not be taken advantage of through InBev's possible new BUD ownership/relationship," ICAP states.

"We contend that Grupo is in the driver's seat with regards to its future."

Shares of Anheuser-Busch (NYSE: BUD) gained 0.15% on Thursday, closing at $68.16, a dime higher on the day.

InBev (EBR: INB) shares fell 0.29%, or €0.14, to close at €47.71.

Meanwhile Grupo Modelo (Mexican Stock Exchange: GMODELO) saw its share price drop 1.4% to close at 52.24.

TransAlta rejects bid

Also on Thursday a special situations equities analyst noted that the board of Canadian power generation and wholesale marketing company, TransAlta Corp., has concluded that the C$39 per share bid by LS Power Equity Partners and Global Infrastructure Partners (GIP) undervalues the company.

"We respect both LS Power and GIP but their highly conditional approach fails to recognize TransAlta's fundamental value and growth potential," said board chairman Donna Soble Kaufman.

"Accordingly, the board of directors has determined that accepting their invitation to engage in a dialogue about a possible acquisition of the company is not in the best interests of TransAlta and its shareholders."

In Thursday trading on the Toronto Stock Exchange TransAlta (TSE: TA) traded essentially flat (down 0.05%, or C$0.02) to close at C$36.56, approximately 6¼% below the C$39 bid.

TransAlta also trades on the New York Stock Exchange (NYSE: TAC) where its shares declined by 0.6%, or $0.21 per share, to close at $34.73.

According to a July 21 press release from TransAlta, its stock reached a 52-week high of C$37.60 on July 2, 2008, and traded at an average closing price of $34.59 for the quarter ended June 30, 2008.

LS Power Equity Partners, one of the bidders, is an entity associated with New York hedge fund Luminus Management LLC, TransAlta's largest shareholder with a 9% stake.

In a late Thursday email message to Prospect News Daniel Shteyn, equity analyst in the utility & power sector for Desjardins Securities, wrote that he anticipates a higher bid for TransAlta, and expects the board to come under pressure from shareholders to take a closer look at the C$39 per share bid.

Thursday's situations took place as the major U.S. stock indexes were retreating.

The Dow Jones Industrial Average saw the most significant percentage drop, 1.93%, as it lost 224.64 points to close at 11,431.43.

The S&P 500 sank by 1.79%, or 23.13 points, and closed at 1,266.06.

Meanwhile the Nasdaq fell by 0.95%, or 22.64 points, and finished the Thursday session at 2,355.73.

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