urbanSTL

I want to know. Have people lost their noodles? Let me tell you something -- BUD stock ain't worth $70. You may think it is because people tell you, but it ain't. In fact, it's only worth $64.40 at closing on 9/17/2008. (I see it going down further if people begin to realize that market forces do in fact apply to all stocks.)



Rules of Investing

#1: Shares are worthless pieces of paper until you sell them.

#2: Shares are only worth the price at which buyers and sellers agree.

#3: Markets do not exist in vacuums. (Especially the cool Dyson ones)



On July 12th, InBev offered up a deal to pay $52B for x-number of BUD shares @ $70/share. It's clear they were willing to pay that amount for the right to gain a controlling stake in the company. But just because InBev was willing to pay that price does not mean the residual BUD shares are worth the same amount. Remember Rules #1 & 2 - Shares are worthless until you sell them and sale price is only determined by the price at which buyers and sellers agree.



So you think that BUD is worth $70/share? Ok, fine. If this deal was never even thought of, I suggest BUD would be worth approximately $45/share now. That's a spread of 55%. Are you telling me that InBev can instantly make BUD 55% more valuable just by purchasing it? I don't think so.



Don't forget Rule #3: No stock exists in a vacuum. The DJIA has decreased 15% since May 23rd. Companies highly correlated with BUD in the Alcoholic Beverages sector have faired worse than the DJIA (ABV:-32%, TAP:-17.3%, HINKY:-19%.) Is anyone going to tell me that these market forces apply to every stock in the world except BUD? BUD is special, right? I don't think so.



You are now aware that there is little real correlation with the BUD shares bought by InBev for $70/share and the residual BUD shares. But many investors thought there was! And the more people that thought and acted in that manner, the closer the spread became over time. It's kind of neat how the herd mentality works. If enough people believe in and utilize a given strategy, the market will in fact be influenced by it.



Get this. If a majority of investors develop a strategy that values companies with multi-billion dollar losses, those companies' share prices will increase! Pretty stupid, eh? Sure, but who ever said the market had to make sense?



Warren Buffett admitted he made a mistake selling 61% of his BUD holdings. I bet you and I would love to make the kinds of mistakes Warren Buffett does. Because you know, making these kinds of mistakes over time has helped Warren get to the point where he is now. Just because he said he made a mistake doesn't mean he believes it! Hasn't anyone listened to what he's been really been saying and doing?



Remember kids, a noodle is a terrible thing to waste!

innov8ion wrote:After the deal is done, every shareholder is paid $70/share in cash?

I was under the impression that this would be the case.

^^Each and every BUD shareholder at the date of closing will get $70 in cash, with which they may do as they please. Anheuser-Busch will then become a wholly-owned subsidiary of A-B InBev. This assumes that InBev doesn't have to issue more stock to come up with the acquisition price. Even if that is the case, however, I'm sure they'd just sell the new shares for the necessary cash, rather than trade new shares for BUD shares.



I'm not sure exactly what will happen with Busch Entertainment, and other A-B subsidiaries, assuming they were to keep them. I believe A-B's minority stakes in Modelo, Tsingtao, and others are to be purchased with cash (assuming those companies don't buy them back or agree to let them be sold to someone else) and would be held by the overall holding company, A-B-I, rather than the A-B subsidiary.



I do not believe there is any mechanism whereby someone could refuse to sell their shares once the majority (or whatever percentage is required) of BUD shareholders approve the deal. I suspect there would be some deadline set for shareholders to cash out, after which their BUD paper becomes worthless, but I'm not sure exactly what the precedent is. So, if someone has some BUD stock certificates sitting in a safe deposit box somewhere that they have forgotten about, would they be screwed? Not sure. I guess A-B InBev could just set up escrow accounts for all of the unredeemed BUD paper, and those certificates would no longer have any voting rights or value other than as a means to access the escrow account.

innov8ion wrote:

jlblues wrote:^^Now might be a good time to break out your favorite Monte Carlo simulator.

Very good point! Ref: http://en.wikipedia.org/wiki/Monte_Carlo_method

You can download free 15 or 30-day trials of CrystalBall, @Risk, and Solver Premium Edition. There is also a great spreadsheet modeling textbook that comes with - at least the First Edition does - a "free" student edition of CrystalBall. It's a great book that you will probably need eventually in B-School, if you don't have it already.



http://www.amazon.com/Management-Scienc ... 546&sr=1-1

another article today:



Thursday, September 18, 2008 - 5:19 PM CDT | Modified: Thursday, September 18, 2008 - 5:27 PM



Analysts: Wall Street turmoil threatens InBev’s takeover of Anheuser-BuschSt. Louis Business Journal



READ:

http://www.bizjournals.com/stlouis/stor ... ily74.html

BUD is trading at $67 in pre-market after the announcement directly below. Now the spread is only 4.4% with a cost of capital for investors at about 4% per annum (approx 1% for the holding period.) This leaves only about a 3% true spread.

Stocks head for big rally on bank rescue hopes, temporary ban on short sales of financials

http://biz.yahoo.com/ap/080919/wall_street.html



NEW YORK (AP) -- Wall Street headed for a huge rally Friday after the U.S. government said it is creating a plan to rescue the nation's troubled banks from their souring debts.



If a plan is put in place to help the banking industry, it could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has grinded to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc.



The government made some other big moves on Friday to prop up the stock market.



To help limit the freefall in financial stocks, the Securities and Exchange Commission announced early Friday it is temporarily banning the short-selling of nearly 800 financial stocks. Short-selling is the common practice of betting against company stocks by borrowing its shares, selling them, and pocketing the difference when they fall.



And to help calm investors' anxieties, the Treasury Department has decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds' exposure to the embattled financial industry.



Ahead of the market's open Friday, Dow Jones industrial futures rose 518, or 4.72 percent, to 11,500. Standard & Poor's 500 index futures rose 64.40, or 5.35 percent, to 1,267.80. Nasdaq 100 index futures rose 70.50, or 4.13 percent, to 1,779.00.

The banks financing the deal show little to no indication of weakness.

UPDATE: InBev To Close Anheuser Deal Despite Credit Crisis

http://money.cnn.com/news/newsfeeds/art ... RTUNE5.htm



BRUSSELS -(Dow Jones)- InBev SA (INB.BT) said Friday it is still on track to close its $52 billion purchase of U.S. brewer Anheuser Busch Cos. Inc. (BUD) by the end of the year, despite the crisis racking the credit markets.



"InBev has fully committed financing in place with signed credit facilities from a group of leading financial institutions," said InBev spokeswoman Marianne Amssoms.



"We are on track to close the transaction by the end of the year," she added.



InBev is raising $45 billion in debt to buy Anheuser for $70 a share, in one of the largest all-cash corporate mergers in history. Yet Anheuser's shares closed Thursday at $65.71, an indication that some investors have doubts about the merger getting done amid worries about the viability of numerous financial institutions.



The spread may also be an indication, analysts said, that "merger arbitrageurs" - firms that bet on the odds of a merger being completed - have been selling their positions to raise cash.



InBev and its consortium of lending banks - which includes Banco Santander, Bank of Tokyo-Mitsubishi, Barclays Capital, BNP Paribas, Deutsche Bank, Fortis, ING Bank, JP Morgan, Mizuho Corporate Bank and Royal Bank of Scotland - completed the primary syndication of the new debt at the end of August.



"(This group) represents a very diversified group of strong banks, giving InBev access to all significant capital markets," Amssoms said.

innov8ion wrote:

Central Scrutinizer wrote:

innov8ion wrote:That is factually incorrect. Security prices are only determined in markets by market participants which are subject to the economic forces of supply and demand (let's just suggest that supply is static.) I challenge you to provide one instance where this is not the case.

And you're studying for an MBA? Oh dear!



Have you ever held a stock certificate in your hands? If you have, then you have your answer. And your "one instance".

You do realize that a stock certificate is still a share of stock? A share of stock bought on the market that was and always will be subject to the forces of supply and demand? Try again.

If you honestly think that the price of a share of stock can only be set by the market (as you claimed), I really, truly think that you should find another field of study other than an MBA.

innov8ion wrote:

Central Scrutinizer wrote:

innov8ion wrote:The only sense he ignores the market is in being dispassionate toward the noise/ripples that occur in the short-term. However, his transactions both on the buy and sell side do capitalize on market inefficiencies. How can one capitalize on market inefficiencies by ignoring the market??? One can't and he does not. Warren Buffett knows the market and exploits it to his advantage.

No. Buffett knows businesses, not markets. Actually, he does know markets - he knows to ignore them. As he (and Charlie) said this year, they have no idea where the market is going tomorrow, next week, or next year. If they did, they wouldn't even bother evaluating businesses and would buy S&P futures instead. It would be a lot easier.

Why do I get the feeling that I'm talking to a brick wall? You do realize that if one acts on something, one can't be ignoring it at the same time? Because Mr. Buffett himself says he acts based upon market inefficiencies. So he can't be ignoring the market like you incessantly suggest. Unfortunately, your stubbornness appears to stand in the way of clear thinking.



Warren Buffett:



- "Berkshire's arbitrage activities differ from those of many arbitrageurs. First, we participate in only a few, and usually very large, transactions each year. Most practitioners buy into a great many deals perhaps 50 or more per year. With that many irons in the fire, they must spend most of their time monitoring both the progress of deals and the market movements of the related stocks. This is not how Charlie nor I wish to spend our lives. (What's the sense in getting rich just to stare at a ticker tape all day?)" -- Buffett himself speaking about market arbitrage

- "I'd be a bum on the street with a tin cup if the markets were always efficient." (He admits exploiting market inefficiencies)

- "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." (How do you determine the value of price w/o comparing it to market value?)

- "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." (He pays attention to the market. In fact, he can be seen as a market contrarian.)

- "Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." ('Nuff said. Buffett is speaking about market inefficiencies.)

- "I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out." (Buffett speaking about exploiting market efficiencies."

- "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." (Buffett again as a market contrarian.)

Wow, way to completely misunderstand what he is saying. Buffett is not a market contrarian, because he ignores markets. He doesn't participate in them. He will buy a great business in whole or in part whether "the market" is up, down or sideways.



Like talking to a brick wall is a great analogy. Unfortunately, it's not in the direction you think it is.



ETA: I'm still waiting for an example:

Central Scrutinizer wrote:I challenge you to find one instance where he recommends using the market to guide your investment decisions. Just one. (Not counting his advice that people who don't understand investing or don't want to put in the time should simply buy an index fund).

The Central Scrutinizer wrote:

DeBaliviere wrote:

innov8ion wrote:After the deal is done, every shareholder is paid $70/share in cash?

I was under the impression that this would be the case.

This is correct. Anyone who doubts that this is the deal should not even be listened to.

The difference between CS and I is that I can admit when I am wrong. I have no problem with being wrong. I see it as a learning process. For others, it appears to be about ego.

The Central Scrutinizer wrote:

innov8ion wrote:That is factually incorrect. Security prices are only determined in markets by market participants which are subject to the economic forces of supply and demand (let's just suggest that supply is static.) I challenge you to provide one instance where this is not the case.

And you're studying for an MBA? Oh dear! I'd be a bum on the street with a tin cup if the markets were always efficient.If you honestly think that the price of a share of stock can only be set by the market (as you claimed), I really, truly think that you should find another field of study other than an MBA.

You can keep insulting me if it makes you feel better, CS. I understand you have some internal pressures to deal with and I forgive you. However, you have yet to demonstrate how share prices are not determined by markets. Perhaps they are determined by the Wizard of Oz? Follow the yellow brick road...

Central Scrutinizer wrote:Wow, way to completely misunderstand what he is saying. Buffett is not a market contrarian, because he ignores markets. He doesn't participate in them. He will buy a great business in whole or in part whether "the market" is up, down or sideways.

So you acknowledge Buffett's statement that "I'd be a bum on the street with a tin cup if the markets were always efficient" yet fail to draw the simple connection between that and exploiting those markets for gain? It's very widely known that part of his strategy involves value arbitrage, or capitalizing on market inefficiencies on both the buy and sell sides. Look, if you refuse to listen to Warren Buffett himself, why should I expect you to listen to me?



Right, he doesn't participate in markets. Buffett must not have sold 61% of his stake in Anheuser-Busch last month. Because in doing so, he would have participated in markets. I commend the logic.

Central Scrutinizer wrote:ETA: I'm still waiting for an example: I challenge you to find one instance where he recommends using the market to guide your investment decisions. Just one. (Not counting his advice that people who don't understand investing or don't want to put in the time should simply buy an index fund).

I've already stated various examples and find no purpose in repeating myself. This is my last exchange with CS on this topic. In rhetoric, it is inadvisable to discuss with anyone that displays such an utter disregard for logic.



Of course he will say it is I that is being illogical and unreasonable. Fair enough. You can have the last word if it makes you happy. I think almost anyone reading this exchange would find my viewpoint on this to be fairly reasonable and full of examples from Warren Buffett himself.



Now, let's get back to talk of Anheuser-Busch!

Grupo Modelo looking for more money or honestly not into the merger?

Grupo Modelo to file for arbitration over A-B-InBev deal

Grupo Modelo notified Anheuser-Busch that it plans to file for arbitration, claiming it has the right to consent to InBev's planned $52 billion takeover of the Budweiser maker.



A-B said it told Grupo Modelo, of which A-B owns half, and its shareholders that it believes “such claims are entirely without merit” and that it will “vigorously contest such claims,” according to a filing Friday with the Securities and Exchange Commission. “A-B believes that the arbitration proceeding will have no impact on the completion of the transaction with InBev.”



Analysts saw this development as proof that Modelo is backed into a corner.



(click title to continue reading)

and another story on the financial uncertainty:

Credit market instability rattles InBev's takeover of Anheuser-Busch

Instability in the global credit markets continues to threaten Belgian brewer InBev’s planned $52 billion takeover of Anheuser-Busch Cos. Inc.



Morningstar Inc. analyst Ann Gilpin followed an initial warning to Anheuser-Busch investors Sept. 16 with another note Sept. 29 about the pending acquisition. Citing “turmoil spreading across the European banking landscape,” Gilpin wrote that “should the credit environment deteriorate further, the proposed $52 billion takeover of A-B could fall apart. At this point, we think the deal is likely to go through, but with new uncertainties unfolding almost every day, we think it is important to be cautious.”



At least three of the 10 European banks lined up to provide lead financing for InBev’s takeover of Anheuser-Busch have encountered trouble in recent days. Fortis was bailed out Sept. 29 by the governments of Belgium, Luxembourg and the Netherlands, which invested a combined 11.2 billion euros ($15.5 billion) in the respective Fortis institutions in their countries. That was followed Friday by the Dutch government’s decision to take control of Fortis’ Dutch operations for 16.8 billion euros ($23.2 billion).



(click title to continue reading)

Jrathert wrote:Grupo Modelo looking for more money or honestly not into the merger?

I'm not sure why they'd really care about the acquisition one way or the other, unless they really don't believe InBev management would be a good partner.



I don't think it's about "more money", since they don't get any money out of the deal unless InBev acquires the other half of Modelo. It's probably mostly about getting more concessions on Modelo's control over the sale of that half of their company and the option of buying it back.

http://stlouis.bizjournals.com/stlouis/ ... %5E1692310



Is this good or bad for St. Louis? The fact that AB has hired a local AB guy, has to be a good sign. However, I'd like to know if the fact that Luiz Fernando Edmond, currently InBev's zone president for northern Latin America, becoming the zone president for North America means he is over Peacock, limiting his influence.



On another note, the global financial crisis continues to cause AB stock to drop...



http://www.stltoday.com/blogzone/mound- ... ven-wider/

Very Interesting



InBev May Seek Partners to Help Pay for Anheuser, Merrill Says

By Meera Bhatia



Oct. 15 (Bloomberg) -- InBev NV, the Belgian brewer planning to buy Anheuser-Busch Cos., may bring in ``strategic investors'' to help pay for the purchase after postponing a stock sale, Merrill Lynch & Co. analysts said.



InBev, which said after markets closed yesterday that the $9.8 billion rights offer was halted until markets stabilized, has arranged a so-called equity bridge loan of the same size that must be repaid six months after the takeover is completed. Tumbling markets have pushed InBev shares near a three-year low.



The main InBev shareholders, a group of Belgian families and Brazilian investors, declined to take their full entitlement of stock rights, potentially risking their controlling stake, Merrill's Nico Lambrechts said. A ``wild card'' scenario would see those investors stump up more cash to buy stock, or else find another buyer for their unwanted rights, he said.



``A higher share price at the time of the rights issue reduces the dilution impact,'' the analyst wrote in an e-mailed note today, without giving any theories on who InBev may target as a ``strategic investor.'' He rates InBev ``buy'' and expects a 47-euro stock price, compared with yesterday's close of 33.72.



READ FULL STORY:

http://www.bloomberg.com/apps/news?pid= ... fer=europe







Another...







Modelo attempts to derail InBev Anheuser deal

By Julie MacIntosh in New York



Published: October 16 2008 20:56 | Last updated: October 16 2008 20:56



Grupo Modelo, the Mexican brewer, made good on its threat to request arbitration over a $52bn deal for its part-owner Anheuser-Busch to be acquired by InBev, but InBev and Anheuser expected the claims to have no impact on their ability to close their merger by the end of the year.



Modelo has argued since the deal was inked this summer that under a 1993 agreement governed by Mexican law, Anheuser cannot transfer ownership of its half stake in Modelo without giving Modelo the chance to buy itself back.



READ FULL STORY:

http://www.ft.com/cms/s/0/6d15949c-9bb3 ... 07658.html









and yet another...





Deal Financings: Nobody Moves, Nobody Gets Hurt

Posted by Heidi N. Moore

Zen philosophers remind their students that they cannot see their reflections in rushing water. Instead, they must be still.



The debt markets are anything but Zen, but bankers there are following similar advice and not moving a muscle. The evidence: There have been no pricings of new high-yield issues in the past three weeks. The Fitch High Yield Forward Calendar currently stands at $33.4 billion, essentially unchanged from last week’s total of $33.6 billion.



The equity markets have seen a similar freeze, with no initial public offerings for more than nine weeks. InBev attempted a $9.8 billion rights offering this week to help finance part of its planned $52 billion takeover of St. Louis brewer Anheuser-Busch, but volatile equity markets caused the Belgian-Brazilian brewer to beat a hasty retreat.



Until still waters replace the market turmoil, it is unlikely any of a number of companies trying to finance mergers and acquisitions will have a shot at selling their debt securities to investors.



READ FULL STORY:

http://blogs.wsj.com/deals/2008/10/17/m ... lenews_wsj

No idea where this is headed right now, I guess it all depends on the market, but the need to find additional investors is interesting:



A) As I pointed out before, $9.8 billion is a significant financing gap, and a large chunk of change to expect to bring in from a handful of investors. The only entities that could bring in that much would be large I Banks and PE firms, and I'm not sure there are many of those that would be in a position to do that right now, assuming they'd be interested. And folks like Buffett probably have better opportunities elsewhere.



B) The fact that the largest InBev shareholders declined to exercise their rights and expand their holdings, at a discount, says a lot.



C) InBev would have to offer a pretty big discount to any "strategic investor" of that size, over the already three-year low share price, otherwise why not just buy shares on the open market and/or wait to see how things shake out. As one of those articles pointed out, a discount of that size would really dilute the current shareholders' stakes. They probably aren't going to be too happy about that, and any such deal would need their approval.



D) That 6 month bridge loan sounds expensive in the current market, and very risky.

^ In regards to (B), keep monitoring the spread. That action will discount all other information. By listening to the market, it will tell us how likely the deal will be.

So, if the deal, for some crazy reason, fell through, I have a few questions:



Will this just prolong the uncertainty? Will this deal eventually happen when financing comes through and the economy gets better?



Will AB take preventative steps to stop future takeover, if the deal collapses?



What shape will AB be left in if the takeover fails? Will it impact them negatively or not much at all?



It seems to me as if this is a done deal, regardless, but if it does fall through, AB needs to immediately go into defense mode.



INBEV stands to lose a ton of money if the deal collapses, due to their financing falling through. Provisions in the deal call for payment by the party at fault to the other party, if the deal fails. I doubt INBEV will let that happen.

So, if the deal, for some crazy reason, fell through, I have a few questions:



Will this just prolong the uncertainty? Will this deal eventually happen when financing comes through and the economy gets better?



Will AB take preventative steps to stop future takeover, if the deal collapses?



What shape will AB be left in if the takeover fails? Will it impact them negatively or not much at all?



It seems to me as if this is a done deal, regardless, but if it does fall through, AB needs to immediately go into defense mode.



INBEV stands to lose a ton of money if the deal collapses, due to their financing falling through. Provisions in the deal call for payment by the party at fault to the other party, if the deal fails. I doubt INBEV will let that happen.

Dogtown : If the deal falls through, and I hope it doesn't, I am expecting to see the stock price drop 30% - 40% quickly. It hovered under $60 last week (today it closed just over $63).



Given better economic conditions the price should/would be near $70, but even before all this unwinding happened AB's stock price seemed to strain getting near $70.



Because of the buyout offer, the stock price has been protected. If the buyout goes under, then there is not a floor under the price. It just has not been factored in, as many of the other stocks now reflect all of the turmoil, AB's does not.



-Scott.

At this point it really has nothing to do with where the price is on the stocks. ... moreso, will the banks fail they have made their financial deals with and/or will the banks keep committed to the deal. That is the main risk now.

At this point it really has nothing to do with where the price is on the stocks. ... moreso, will the banks fail they have made their financial deals with and/or will the banks keep committed to the deal. That is the main risk now.

I never said, nor implied, that the success of the buyout hinged on the stock price. And, certainly the big question is "Will the financing come through".



But, the stock price does reflect the uncertainty of the deal succeeding. With the price having been some 10% to 20% under $70, that shows a fair bit of nervousness out there.



The stock price is always a reflection of the value, perceived and real, of a company.



-Scott.

SouthSideScott wrote:The stock price is always a reflection of the value, perceived and real, of a company.

Oh boy, here we go again. (See the last several pages)

Southsidescott, just curious. Do you want the AB/INBEV deal to go through because you feel it is best for the company or its stockholders? I have been a stockholder for about 5 years. The stock price has been stagnant. I understand that the deal is in our best interest as shareholders, but is it worth a short term payday, to jeopardize AB's future. (not saying the deal will for sure hurt AB)



I wonder if AB could globalize on their own. Their conservative approach internationally has hurt them, but they could change their strategy and florish as an independent company, in my opinion. I just wonder if INBEV's strategy will work, LONG TERM. I'd hate to see them destroy the goodwill, reputation and image AB has built over the years. I bought AB stock for the long term. I just hope the company grows under Brito's leadership.

jlblues wrote:

SouthSideScott wrote:The stock price is always a reflection of the value, perceived and real, of a company.

Oh boy, here we go again. (See the last several pages)

Haha! I won't add to it, but it's absolutely true...