Berkshire Ruminations

Thursday, June 19, 2008

Thoughts on Anheuser Busch and InBev

I have always had warm feelings towards Anheuser Busch. Growing up in the St. Louis area I couldn’t help it – afternoons at Grant’s Farm, countless Cardinal games at Busch Stadium and the occasional brewery tour. AB is all around you in that town. And it is a good kind of omnipresence. In spite of the differences and segregation with which the city constantly battles, everyone can be proud living in the home of the largest brewer in the world.

So with the proposed acquisition of AB by InBev, St. Louisans are in a complete tizzy. I was contacted by a reporter from St. Louis Post Dispatch on Tuesday wanting my opinion on what role Buffett might play in the deal, given Berkshire's 4.8% AB stake. I wish he had waited a few days to ask because I hadn’t given it much thought (thus missing out on another opportunity to get quoted) other than my initial gut reaction which was sadness that our town could lose yet another large corporate headquarters. But since then I have done a lot of thinking about the deal.

I own AB shares. In fact I bought at $48 them just before Berkshire’s stake was disclosed a few years ago. So it is great that we now have a nice 30% gain, but in the same way I had mixed feelings about the acquisition of Wrigley, I am uncertain of my opinion on this one. It is a great company generating enormous returns on equity - in no year since 1994 has it returned less than 25%. Unfortunately the company has found ways to destroy value just as quickly as it is created – book value per share has also remained flat over this time. But the company does have an extremely valuable brand that rivals the strength of Coke and this has kept price-to-book as well as PE’s pretty lofty. So perhaps, just maybe, InBev could come up with better places to deploy the shareholders’ capital. It wouldn’t seem it could do any worse.

But these are AB concerns, not InBev-AB concerns. And when considering what InBev can bring to the table I don’t see Warren Buffett resisting. His only objection might be the terms of the deal, which is currently all cash. Just as he did with the P&G acquisition of Gillette, he would be wise to negotiate a stock swap instead, deferring the taxes on his gains and also giving him continued exposure to this fantastic business. I am fairly sure he could care less about the extra $2.3 billion in cash that would end up on Berkshire’s balance sheet and would much rather have a few million shares of InBev, a good company in its own right, instead.

Nevertheless, rest assured that if Buffett backs this deal as he should, it will sour his popularity among the fools that know nothing else about him. But remember what they say about a fool and his money.

To see what type of irrationality St. Louis is currently dealing with consider the following as evidence.

Politicians are generally pretty stupid I think, at least when it comes to business and economics. Ordinarily this doesn’t bother me, but when they try to speak as an authority I can get pissed. An example is the genius that our state sent to Washington a few years back, Democratic Senator Claire McCaskill. Not surprisingly she came out screaming when the InBev deal was proposed. Check out the following from an article in the Post Dispatch (original here) on Wednesday:

McCaskill blasted the deal as one designed to give "premium profit for hedge fund investors." She said A-B is a strong company that has provided thousands of good middle-class American jobs. "This is not a company that's in stress." Addressing concerns about a foreign firm taking over an American icon, she added: "We do not have a 'For Sale' sign on our front lawn in America."

There is so much ignorance in that paragraph I really can’t even believe the paper printed it. Or maybe I can.

The first statement about hedge funds is just completely baseless - total political pandering. The largest shareholder of AB is Barclays, at a mere 5.1%, after that is Berkshire then the Busch family. Even if all of Barclays’ stake is held through hedge funds, I wonder where she thinks the remaining 94.9% of the premium profits are going. Clearly this woman thinks she is speaking to a very ignorant constituency whom she probably assumes a) is not invested in AB themselves and b) doesn’t even know what a hedge fund is.

While she is correct that “A-B is a strong company that has provided thousands of good middle-class American jobs,” this fact is not threatened by the takeover. If jobs are to be lost as a result of this deal they will be the upper-level management jobs, not the blue-collar factory jobs I am sure she is worried about. InBev has made no indication it plans to move stateside breweries overseas – nor would this seem to be a wise business decision.

McCaskill also seems to need a lesson in M&A. A company need not be “in stress” to be a takeover candidate. How dumb would InBev need to be to pay that “premium profit to hedge fund investors” if the company were in stress? AB’s strength is the very reason it is a target! Duh!

Finally, and most hilariously, McCaskill claims "We do not have a 'For Sale' sign on our front lawn in America." Oh really? I got news for you lady. That is exactly what we have on our front lawn. For decades now we have been shipping our dollars overseas, effectively selling off small pieces of the farm to finance our overspending. What do you expect other countries to do with all those greenbacks, stuff their pillows? As a result of this trade imbalance, of course, InBev’s euros are at an all time high against the dollar.

What I gather from all this is that, at least locally, there is too much sentimentality at play and far too little rational business deliberation. Further, people are dumb. And when you mix sentimentality with ignorance you are left with a lost opportunities.

Full Disclosure: I own shares of BUD, BRK.B and WWY. I have no position in InBev, KO or PG.

Monday, June 09, 2008

USA Today

There was a good article recently in USA Today about Warren Buffett that quotes me, among others.

Thursday, June 05, 2008

RBP Investing

As some readers may know, I recently started writing a couple of new blogs. One is called RBP Investing. RBP stands for Required Business Performance and was developed by a company in New York called Transparent Value.

RBP is a proprietary stock analysis methodology that, although not something Warren Buffett himself would use, is completely consistent with all of his ideals. It looks at companys in reverse, by starting with the stock price and deducing what the market expects of the company, in terms of both revenue as well as actual product sold. From this, the investment question becomes something more like "Does the market valuation make sense?" or "Can this company actually deliver what the market expects?" They call this reverse discounted cash flow analysis.

This made perfect sense to me, being someone who believes DCF analysis is the only legitimate way to value a stock. The RBP method is a pretty ingenious way of looking at things and has the potential, I think, to become mainstream now that Dow Jones has started publishing the RBP Index Series. I encourage readers to check out out the blog at