Last week here at Valuecruncher we looked at the then US$65 a share offer from InBev (INTB.BR) for Anheuser Busch (BUD) and came to the conclusion that US$65 a share looked cheap. Our view was “if InBev want to get this transaction completed there are a lot of obstacles but price looks the key one”. We were wrong. Price was the only obstacle. 24 hours after we wrote the post InBev increased their offer to US$70 a share and the deal was agreed on Sunday night (US-time).

Our analysis put a standalone value on the shares of Anheuser Busch at US$67.65. This is the value of Anheuser Busch remaining an independent company – i.e. not being acquired. Our view was with a standalone valuation above the offer price there was no way that Anheuser Busch would accept the offer. That changed with the InBev bid being lifted to US$70 a share.

Our analysis of the Anheuser Busch valuation as a standalone entity and the assumptions behind them:

Valuecruncher Valuation Anheuser Busch

To people outside the mergers and acquisitions processes these valuation discussions often appear petty. “What is difference between US$65 a share and US$70?”. The target company (the one potentially being acquired) needs to determine the value of their business as a standalone entity and this should be their bottom line number. This is what we did with our valuation of Anheuser Busch. The acquiring company will have completed their own merger financial models that show the combined business incorporating financial “synergies” (that usually means costs that can be cut but also additional revenues that can be achieved). The acquiring company will create a valuation for the target company based on these models. That valuation will drive the offer that is made for the target. The objective is to pay as little as possible and retain as many of the synergies for the acquiring company shareholders as can be achieved. To make an acquisition palatable to the target company shareholders the acquirer will often pay-away some of these financial synergies in their offer (i.e. give up some of the expected gains of the deal). This process is often called the “takeover premia” (or “premium for control”). The takeover premia is typically specific to the circumstances of each particular deal.

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

With InBev (INTB.BR) declining to raise their US$65 a share offer for Anheuser Busch (BUD) we decided to have a look at some projected financial numbers for BUD as a standalone entity using our on-line valuation tool. How does US$65 a share stack for BUD?

BUD Valuation

BUD grew revenues from US$14.9 billion in 2004 to US$16.7 billion in 2007 – a 3.7% compound annual growth rate. Our assumptions of revenues for the next three years are US$17.5 billion in 2008 growing to US$19.0 billion in 2010 – a 4.4% compound annual growth rate. We have projected EBITDA margins to be flat at 24%. We have used a terminal growth rate of 3%. We used a terminal capital expenditure number of US$900 million. We have also used a WACC (discount rate) of 7.5%.

Valuecruncher Valuation BUD

Our analysis incorporates the cash and debt on the BUD balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$67.65 which is 8.9% above the current share price of US$61.30. Our valuation is also 4.1% above the InBev offer. This is a standalone valuation for BUD. If InBev want to get this transaction completed there are a lot of obstacles but price looks the key one.

The WACC (discount rate) and terminal growth are the key assumptions with our numbers. If the WACC (discount rate) is decreased to 7.0%, keeping all other assumptions constant, that increases our valuation from US$67.65 to US$76.77. A WACC (discount rate) of 7-8% is our estimate of a “reasonable” WACC (discount rate) for BUD. Dropping the terminal growth from 3.0% to 2.5% decreases our valuation from US$67.65 to US$60.67. A terminal growth rate in the 2.5-3.0% range is our estimate of a “reasonable” terminal growth rate for BUD.

Based on our analysis the current offer looks undervalued. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.