16% Return in about 6-8 months?

I noticed that Anheuser Busch stock closed at $58.50 on Thursday. That represents over a 16% discount offer the offer price($70/share) as part of the InBev merger announced earlier this year. It got me thinking this is a very reasonable arbitrage opportunity.

There are numerous risks involved that could derail the merger from happening, but I would say there is still a high likelihood of it happening.

Reasons Why It Would Still Happen:
-Deal makes sense for InBev's business strategy.
-$1 billion break up fee. BUD gets a big chunk of change if InBev backs out.
-Management teams and company boards from both companies have agreed to the merger. At this point its in their best interests to make this happen.
-Financing was already arranged. I guess there is a reasonable risk that the financing could fall apart with companies going bankrupt, etc. that are providing the funding.
-The biggest concern over the merger, pre-credit crisis was that the US government would block this deal. With the credit crisis I believe that would be a non-issue. The government doesn't want to slow down business at this point with the economy the way it is.

What Could Derail it?
-InBev stockholders vote down merger.
-BUD stockholders vote down merger. I don't think this is a serious
-Financing falls apart. Probably the biggest risk, but there are many opportunities for the management team of InBev to recover if financing falls apart since all the principals will still be in agreement that the merger/sale is a good idea.
-Any other normal merger hiccup.

I am guessing the sale could be complete as early as 2Q09 which would yield a great return. Something to ponder.

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Comments (14)

I have personally examined this deal as well. The reason I haven't jumped is that the financing was launched in Europe with $45 Billion of leveraged loans. The major buyers of these loans are banks and the banks in europe are in even more trouble than the US and the US market is basically shut down. Also, the downside is very high for a small upside. Remember BUD was stagnant around $50 before the deal, and will likely go lower as a result of the current market disruptions if the deal falls through. Just my 2 cents, though.

16% upside (capped), how about downside?

If the deal doesn't happen, you can see way more than 16% drop.

Risk/return ratio sucks.

Why on earth would you think this is an arbitrage opportunity? You really have absolutely NO understanding of the concept because this is certainly NOTHING of the sort.

With companies slashing workforce left and right, you have the 'acumen' to target a DOG that has limited upside propped up ONLY with the hopes of a merger...PLEASE spare us the buffonery.

You might as well invest in penny biotech stocks if you want to live the idea of RISK/REWARD with a tangible reward for 8 months of wait for no guarantee.

You have absolutely no data to support the initial bid of $70 and why that is valid, no data to understand why it is trading at current levels and what the valuation would be if the deal DOES NOT happen, and absolutely NO IDEA what range the stock should trade in IF APPROVED.

Sorry to burst your bubble, but you are not the sharpest knife in the drawer when it putting your money to work for you in the markets or real estate. Investing on hopes/dreams is the reason you are never going to get to 2 million in securities...Start looking around you at the cold, hard facts investors are faced with TODAY, not when this bid was made.

Did you ever buy an investment book like I advised you?

Well, I think the above comment was a bit harsh. But it does raise a valid point: are you an INVESTOR or a SPECULATOR.

If you want to speculate, there are ways to get much better risk/reward ratios (e.g., buy some $70 strike call options).

Ask yourself: what would Benjamin Graham do? The answer is probably: buy something else besides Anheiser Busch.

I personally like a lot of companies out there right now at these cheap prices, especially stocks with decent dividend yields. But do your homework before you pull the trigger!

It's really quite sad how agressive and beligerent the tone of some of the commenters has turned now that the crisis is out in full force. How much difference two months makes in people's minds. Or perhaps these beliegerent posters would simply stay silent before?

It's his money. Nobody has any right to tell him what to do with it. And 99% of people here are way underqualified to comment on the extent, or lack thereof, of the financial crisis.

I've been reading this blog for a very very long time and 2Mil has always been a very cordial, enjoyable person to read about. There is absolutely no reason to sling putdowns at him personally. If you disagree, then politely and cordially just share with him your opinions and insights. Remember, emotional maturity gets you further in this world.

I agree that concerned has poor communication skills, but then again 2mil was just learning about investments from David Bach, the "Latte Factor" guy, a mass market investment manager for clueless investors, and suddenly decided to jump into risk arbitrage.

2mil, what you have is not an investment strategy. It is getting tips from random articles and from a pundit with the deepest pockets in the world. His investment profile and tolerance does not equal yours. Also, Buffet has access to information and investment opportunities that you do not have access to.

IRT investing your downpayment in stocks, is your wife fully on board? It seems to me that you have a good thing going with a pretty fantastic woman who gave up her career to follow you to China. Is she also comfortable with gambling your future home in the market, which you appear to not understand with any depth? Usually, that's a losing bet. Keeping your wife happy by respecting her needs and wants is critical to success. Don't let greed get in the way of keeping a happy, loving household.

The 16.4% discount represent a potential 19.7% gain on the price you pay. The question is do you really think you know more about the risks of this deal than the arbitrageurs. I would say your downside risk is much greater than your upside potential.


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Poor communication skills? Please don't confuse my lack of tact as an example of poor communication...2million is a dreamer that has a nice job, nice family, but no sense when it comes to his money. All you need to do is look at his balance sheet to understand why.
To be entirely clear, I follow this blog merely for the laughs. Looking at his portfolio allocation followed by 'musings' on his investment strategy is always good for a chuckle.

I don't want him to fail...Quite the contrary. I just don't see it happening with his current asset allocation strategy and debt obligations.

I just found a link to an article that also explores these current arbitrage opportunities. While I agree there is risk, I still think these have some merit.

Thanks for all the comments! I appreciate the positive and negative :-).

Dear concerned,
Please enlighten me as to what you believe is wrong with 2million's asset allocation strategy and debt obligations?
Regarding the debt obligations, the majority of 2million's debt is tied up in rental properties. As long as the properties remain cash flow positive, what do you feel is inapproriate about them?
As for asset allocation, 2million has the remainder of his non-real estate money 25% in cash and 75% in stocks. What would you recommend for his current net worth? Just curious.
Personally I think investing in stocks are not ideal, but are a necessary evil for those who don't have time to invest in their own businesses. The stock game is heavily rigged towards insiders, i.e. those who were granted options for pennies on the dollar (investment bankers, CEOs, CFOs, etc) or those with the assets to demand bargains unaccessible to the rest of us (Warren Buffett in the Goldman and GE deals).
But what alternatives would you suggest for most middle-class working people?
My net worth is many times 2million's but I imagine I had a similar asset allocation when I was at his net worth (with the major difference that I had a huge slug of insider options).

Frankly I don't believe that BUD is as bad an investment as "concerned" thinks. It's not a glamorous stock like many, but a look at the SEC filings shows a company that is doing well.

From BUD's 2nd Quarter 10-Q filing:

1. Sales are increasing (not skyrocketing, but beer and related beverages aren't exactly new products). Overall US sales were up by only 0.5%, but US revenue increased by almost 4%, indicating that they are able to increase prices and maintain sales (i.e. the US beer market is not so cut-throat that they cannot increase prices). International sales, while only a modest portion of their revenue at the moment, were up 4.8% by total shipped volume, and over 10% by revenue (again indicating that BUD has the leeway to raise their prices as needed).

2. The company is doing well financially, with solid profits and it is paying down debts.

3. The company is paying dividends at roughly a 2.5% annual yield (better than what you get at many banks) and has been repurchasing shares. The number of outstanding shares (diluted) has decreased from 765M to 727M between Q2 '07 and Q2 '08.

I'd have to look around a bit, but I seem to recall reading an article in the last couple weeks that mentioned that while many segments of the economy are taking a big hit from the reduced consumer spending, sales of alcoholic beverages was one of the segments that was mentioned as not being strongly impacted. My guess is that many people are cutting out other discretionary spending, and then having a beer or two to forget how lousy they feel.

Even if the InBev deal does not go through, BUD isn't necessarily a horrible company to have some shares in right now. The above info is from their second quarter SEC filing, so I'd wait a few days until the third quarter filing (due about now I believe) is posted and you can check to make sure that things haven't suddenly changed for the worse.

Also, InBev has repeatedly re-iterated that they wish to complete this deal. Given that European beverage manufacturers have been having a rough time due to declining sales in Europe, I believe InBev would very much like to pick up a company that is seeing increasing sales around the world, particularly one as well-known as Anheuser Busch. BUD would serve nicely to offset their lower profit margins in Europe. The plus for BUD stockholders is that I believe the deal was offered as cash, rather than shares of InBev, which makes InBev's price swings less of a concern for stockholders in BUD.

BUD's stock price as of Friday was $62.03, which still leaves an almost 14% premium if the InBev purchase does take place. If you are simply looking to make a short-term profit and be out in a few months, it's a risk. If you are also considering a possible long-term investment (if the InBev deal does not pan out) BUD's better than some other choices on the market just now.

I almost missed this paragraph in the 2nd quarter 10-Q:

"In June 2008, in connection with its plans to reduce costs and improve efficiency, Anheuser-Busch announced an enhanced retirement program to be offered to certain salaried employees. The program will provide enhanced pension and retiree medical benefits to salaried employees who are at least 55 years old as of December 31, 2008. The company estimates that its salaried workforce will be reduced by 10% to 15% as a result of this program and attrition. In conjunction with this program, the company expects to recognize in the fourth quarter of 2008 a one-time pretax charge estimated in the range of $300 million to $400 million for enhanced retirement and severance costs, with associated cash expenditures of approximately $20 million to $30 million."

I'd interpret this to mean that the net earnings for the 4th quarter will take an almost 50% hit, due to the one time charge. This will likely drive the price down some, but coming out of the quarter the company will see it's fixed costs decrease (due to the 10 to 15% drop in salaried employees) which should boost their profit margin a bit next year. I'd be very interested to see if the stock takes that hit around Christmas from investors who don't realise that the company is streamlining costs.

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A personal finance weblog of my journey to reach my goal of $2 million + the value of my primary residence.
Current Net Worth: $1,938,393


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