The credit crisis hit the private equity business extremely hard, as the seizure of credit markets made deal making a near impossibility.  Not to mention the fact that companies already owned were often worth far less than the acquisition price.  It is not too much of stretch to say that private equity is leveraged to the general health of the economy; making good times better, but bad times even worse.  That is why it is great news to hear that Stephen Schwarzman, CEO of the largest private equity firm in the world, saying that he is seeing, “more than green shoots of recovery.”  Schwarzman spoke reassuringly about his industries prospects to at a conference in Dubai, according to Reuters news wire.

“We do not expect the U.S. economy to slip back into recession but we do believe that weak consumer spending and continued constraints on bank lending will dampen the U.S. economic recovery in 2010 and 2011,” Schwarzman said at the Super Return Middle East conference in Dubai.

While it would take several years before “freely flowing but responsible credit” was re-established, the private equity industry was in a “radically different place” than a year ago, given signs of life in the bank financing market, he said.

“We can certainly do transactions in the $3-$4 billion range at this stage in the cycle,” he said on the sidelines of the conference. “And with low leverage involved, deals of that size can use in excess of $1 billion equity.” — Reuters 10/14/2009

Not only is Schwarzman offering up a slightly more optimistic tone, but his firm has stepped up in their deal making efforts recently.  In the month of September, Blackstone (BX) teamed up with CVC Partners in bidding for Bellsystem24, a Japanese telemarketing arm for Citigroup (C).  A few days later, in the same day Blackstone bought interests in a London office complex and sold a portion of its stake in Cineworld Group.  Since then two blockbuster deals have come down from Blackstone in the last three weeks.  One, they sold Orangina Schweppes to a Japanese firm Suntory Holdings, reportedly for about EUR2.6 billion.  Then, in early October they announced a deal to buy theme park franchises from Anheuser-Busch InBev (BUD) for $2.7 billion.

Schwarzman is seeing a lot of opportunity to buy assets on the cheap right now, and by the sound of it he may not be done yet.  He referred to potential IPOs for some of his portfolio companies and said he is not sure how long that window will stay open.  One thing is for sure, the improvement in the world economy has allowed his firm to take advantage of some wiggle room that simply was not there a year ago.  Back then, everyone was starring off the edge of a crevasse and primarily concerned with capital preservation.

While we cannot say that credit markets are back to where they were prior to the crisis, they have begun to improve.  That can be seen in the huge upswing in corporate debt and in the almost daily M&A activity.  Schwarzman knows that there are challenges ahead, but he is never one to pass up a chance to make a profit.  There is no doubt that he is one of the best deal makers in the world, and when he starts to get optimistic, there is reason for excitement among shareholders of Blackstone as the stock was up almost 8% today, largely because of Schwarzman’s take on the economy.  As for Ockham, Blackstone is still too new of a (public) company for us to have a valuation rating on, but it is good to see a company and a CEO getting back to business.

Anheuser-Busch (BUD) shareholders-of-record as of October 3, 2008 will vote on November 12, 2008 to approve the sale of the company to Belgian brewer InBev for $52 billion. InBev claims to have solid financing already in place for the transaction and one would assume that such a deal would have great appeal to most bankers in this treacherous environment. Yet, over the past few weeks, BUD stock has been trending downward, rather than closer toward the $70 per share cash acquisition price. If anything, this demonstrates just how edgy the markets are right now.

Here you have the stock of an iconic American brand with dominant domestic market share which is being acquired by an equally as imposing foreign brewer in a combination that will create an international powerhouse. Yet, the stock is currently trading at $62 and change, 89% of the expected acquisition price in only a few months time. Investors willing to buy BUD shares at the current price will get an 11% pop when the transaction is completed—which both companies hope will be before year end. Furthermore, BUD pays a 2.3% dividend, with another quarterly payout due in early December. This much of a discount to the $70 take out price signals that the market might have questions about whether or not this deal will get done.

Perhaps the surging dollar has some believing that InBev will get cold feet before completing the transaction. Perhaps the market believes—despite assurances to the contrary— that financing is not completely lined-up or could become a problem. This seems unlikely. While the credit markets are certainly distressed right now, there is money available to lend for quality deals and this deal meets that criteria. Few enterprises are as recession-resistant as a mega-brewer with solid brands in all continents. In the unlikely event that the deal fell apart, worst case scenario might see BUD stock trade back into the upper forties where it had been parked for some time. While that would be a 22% drop from its current level, BUD has a far firmer floor underneath it than many stocks right now. Its better-than-money market dividend yield and strong history of increasing the dividend are also worthy of noting.

This is a tough market to coax investors into. Thus, it is time for a little unconventional thinking. Normally, only big arbitrage players can profit from trading stocks (of both the buyers and sellers) after a merger deal becomes public knowledge. In this case, due to the current morose investment climate, you have the opportunity to buy BUD stock today at an eleven percent discount to a cash sale that will most likely occur sometime within the next three to four months. You also will get one quarter’s dividend if you buy before the early November ex-div date. To Ockham, this seems like a fairly safe way to make some good money in an otherwise tough stock market.

The saga over InBev’s (INB) offer for Anheuser Busch (BUD) is finally quieting down, and it appears that all it took was more money. We were taken by surprise by the rapid succession of negotiations between the two brewing giants, as companies of this size rarely move at this speed. It was on June 26^th that BUD officially rejected InBev’s offer of $65 per share, claiming that it undervalued the company. August Busch IV, the company’s recently installed CEO was not ready to give up control of the company that his family started 156 years ago. He felt that BUD should remain independent and through his leadership the company could turn around its uninspiring stock performance over the last few years. It is clear to us that the new $70 per share offer is more than a fair valuation and in this economy shareholders and board members alike would be foolish to reject it.

InBev’s reasons for wanting to acquire BUD are obvious; the Belgian/ Brazilian brewer has strong brands in nearly every beer drinking corner of the world except the United States. Budweiser—with its 132 year history—“The Great American Lager” is one of the most recognized brands in the world. However, it is such an American icon and business institution that the takeover bid became increasingly political in nature, prompting even Barack Obama to comment that a foreign ownership of Anheuser Busch would be a “shame”. While culturally this is a sad day for many in St. Louis and around the country, financially the deal makes sense. We would be stunned if the deal does not go through. The alternative for InBev was to continue its pursuit of a hostile bid which may have eventually won out, but would most certainly have taken much more time and engendered even more opposition from BUD loyalists.

We look at stocks from a value perspective and from our view BUD would simply be overvaluing itself if it were to reject the $70 per share offer. The stock was up 9% today after the new offer price was leaked. Prior to the talks with InBev, BUD stock had languished between $45 and $53 for years and the $70 price tag represents a 32% premium over the high end of that range. We have been positive on BUD from a value perspective for some time but even this price is more than fair. When we insert the $70 price into our valuation metrics, it puts BUD just slightly in overvalued territory. For example, historically BUD has traded between 11.54 and 14.34 times cash flow, given current cash flow and the $70 price, that metric pushes to 15.12. It is a similar story with price to sales as well. So, as we stated earlier, we are sympathetic to the blow to national pride of a foreign-owned Budweiser, but it is not pride that pays the bills, its money.

As noted in our post of May 23, 2008, there have been rumors floating around about Anheuser Busch being acquired by InBev. After the market closed yesterday, that rumor became fact as the $46.3 billion offer went public. A combination of the two brewing giants would create the world’s largest brewer. Together InBev and Anheuser Busch own 300 brands selling in six continents and produce more than ten billion gallons of beer a year. InBev has aggressively acquired beer makers around the world but the U.S. market—the largest market for beer by profit—still eludes the company. The fact that the offer has been made public shows that one potential hurdle has been cleared. There was significant concern that InBev would not be able to secure funding for such a large deal in the current tight credit environment. Now, resistance by the Anheuser Busch board and the American public appear to be the remaining obstacles to completing the deal.

August A. Busch IV, great grandson of the founder of Anheuser Busch and current CEO, is vocally opposed to a merger. BUD’s stock performance has been impaired by increased material costs and some industry analysts consider the company “bloated” with substantial cost cutting opportunities. The acquisition price of $65 per share represents an 18% premium to the all time high (pre-takeover rumors) of just under $55 in 2002. Busch would prefer to remain at the helm and attempt to cut costs internally in order to boost the stock price, rather than sell the company to a foreign buyer. The Busch family owns four percent of shares outstanding, and while that is not enough to block a deal, the board has traditionally been loyal to the family. Furthermore, there is a strong contingent of beer consumers in the U.S. that view Budweiser as an American icon, hence the slogan: “The Great American Lager.” These loyal consumers are making their opposition known and do not want this great American brand to be held by a foreign company.

InBev wants Anheuser Busch and its large share of the American market very badly, and it has stated that it is willing to sweeten the deal to woo skeptics. InBev has said that it would be willing to adopt the Anheuser Busch name and move the company headquarters to St. Louis from Belgium. It has also promised that it would not close down any American breweries and claims that it will invite certain members of Anheuser Busch’s board onto the merged company’s board. InBev Chief Executive Carlos Brito attempted to ingratiate himself to the BUD board saying, “We respect the Anheuser-Busch board a lot … we admire them a lot and we think that the business rationale is very strong,”

The merger makes sense from a business standpoint and it follows the recent trend of brewer consolidation. InBev has secured financing, which was a big question mark in our mind when the rumors first surfaced. Now, the larger question is will the board and the beer drinking public accept the deal? Perhaps the board and shareholders could be won over by upping the price to maybe $70 per share–everyone has their price. However, the consumers whom BUD relies upon to buy its products may not be so easily swayed and winning them over will take a more sustained effort.

The Financial Times’ blog Alphaville today broke the rumor of a possible acquisition of Anheuser Busch (BUD) by the giant Belgian brewer InBev SA (INB.BT). InBev—the world’s second largest beer producer by volume—is interested in purchasing BUD—the world’s largest–for $65 per share or $46 billion total. Last October, rumors of merger discussions between InBev and BUD began to ferment, but BUD’s newly-named CEO August Busch, IV adamantly opposed the idea. He wanted to take a shot at improving BUD’s sluggish stock performance under his predecessor. The stock was trading at $48 when he took over as CEO and was trading above $52 before the merger rumor broke this morning.

For InBev, this acquisition would fill the remaining piece of the geographic puzzle– the U.S. market. The combined footprint of InBev and Anheuser Busch would be nearly evenly split between developed markets and emerging markets. The timing appears to be favorable for InBev as the currency exchange gives the primarily Euro driven InBev a relatively cheap purchase price because of the weakened dollar. BUD is also experiencing a profit margin squeeze because of increased material costs. (For example, it buys 7% of all of the rice produced in the U.S. to make beer.) The timing also indicates that InBev would like to get this deal on the table now, fearing potentially greater regulatory hurdles if a Democrat wins the White House in November.

It will be very interesting to see how CEO August Busch, IV will handle the offer. As stated earlier, he was very opposed to the idea of a merger in October, and recently was quoted as saying about a takeover, “we have a defense, if you will, ready to go in the event of an event”. Busch alone will not be able to stop a deal on his own but he may have enough influence over the board. If the board rejects such a deal, InBev will have a choice to make. They could try to make a hostile bid, but that is a risky proposition for an American icon such as Budweiser. InBev will likely try to woo some activist shareholders to put pressure on the board and Busch.

Given the stance of August Busch and the fact that InBev probably does not want to engage in a hostile bid, we doubt that this deal will actually transpire. It would certainly be a good acquisition for InBev, but the tradition of the Busch family as an American success story could be a hurdle too high to clear.