M&A

Bondholder Brew-haha?

The same purchase offer that Anheuser-Busch shareholders are coveting could be terrible for the company's bond owners.
Stephen TaubJune 13, 2008

Anheuser-Busch stockholders may have cheered when InBev, the world’s second largest brewer, on Wednesday proposed to pay an 18 percent premium for the shares of the iconic U.S. beer company.

However, the Belgian company’s $46 billion all-cash offer is facing a barrage of critics, including those who are reflexively opposed to foreign ownership of U.S. assets, and those who fear the deal would stifle beer-market competition and drive up prices.

Perhaps the ones who could wind up the biggest losers are existing bondholders — regardless of whether the deal goes through, asserts GimmeCredit. That is because the heavily debt-financed deal could knock Bud’s credit rating below investment grade, the bond research firm warns in a new report. If that were to happen, prices on all of Busch’s bonds would fall.

“It’s possible the combined company could remain investment grade due to its sheer size, track record of integration, sizable free cash flow, and promise to repay debt as quickly as possible,” says GimmeCredit. “But we feel that would be a stretch.”

InBev says it plans to finance the deal with at least $40 billion in debt and a combination of non-core asset sales and equity. That would double Anheuser-Busch’s leverage.

As a result, GimmeCredit figures the debt of the resulting company would exceed earnings before interest, tax, depreciation, and amortization (EBITDA) by five times. Busch’s current coverage ratio is closer to 2.4 times.

However, even if Busch successfully fends off InBev’s bid, bondholders could wind up losers, says GimmeCredit.

Why? Because Busch likely would become more financially aggressive, selling noncore assets and returning cash to shareholders, or pursuing a deal to purchase the 50 percent of Grupo Modelo it does not already own, the report predicts. “In any of these alternatives, the fundamental outlook for BUD would deteriorate,” it adds.

As a result, GimmeCredit lowered its credit score on Anheuser-Busch to “deteriorating.”