Wednesday, June 18, 2008

InBev, in Bid for Bud, Courts Community






It really ought to be called “uncommon sense”. While it may seem that InBev are doing what any company pursuing an unsolicited takeover bid should do by prosecuting a charm offensive with stockholders, the community, and government, you may be surprised how few companies get it right. The sale of the largest US brewer and its iconic Budweiser brand to Brazilian controlled, Brussels based InBev is not sitting well with US lawmakers or many in St. Louis. However, the proposed $65/share offer, that could result in a $57 billion total takeover bid with assumption of debt, should be sitting well with shareholders who have seen little positive share movement in recent years as Bud’s share and historic pricing control over the US market have been eroded by the massive expansion of small micro-breweries, rising imports, and the search by many beer drinkers of the elusive “anti-Bud”.

It would of course be crazy for law makers and community leaders to comment favorably on the proposed transaction. Nobody likes change and a change that sees the country’s leading brewery, and its leading brand, Budweiser, sold to the Brazilians, is not going to be popular. InBev gets this. This is not the first time the company has faced local hostility during its massive expansion and they have learned much over the years. In addition to a charm blitz aimed at wooing the St. Louis media, community opinion leaders, and Missouri’s Congressional delegation, InBev has set up a website to promote the acquisition by providing reassuring facts and grist for the media mill. This is a very smart move and, again, while it will strike most people as common sense, it is not something done with the regularity necessary to make it “common”.
If anyone hadn’t previously noticed the global shift in economic power that is taking place and gaining momentum during the first decade of the 21st Century, this should do it for you. Anheuser-Busch is not a company in trouble. It is not a company without global reach. It is however a tasty target in the on-going consolidation of global brewing that has seen US number two, Miller, become part of South African Breweries to make the world’s current largest brewer, and the nation’s third largest brewer, Coors, merge with Molson of Canada in 2004 to become the world’s fifth largest beer company. Indeed, that consolidation, and the subsequent merger of SABMiller and Molson Coors operations in the US and Puerto Rico just over six months ago, helped make the InBev takeover bid possible by putting further competitive pressure on Anheuser-Busch.
So, when the 'Show-Me State' gets all worked up about Anheuser-Busch being sold to foreigners, they may care to note that there aren’t really any US owned mega-brewers left but Anheuser-Busch. And even if the company somehow survives the InBev takeover bid, its Missouri roots will likely be diluted by the merger of Anheuser-Busch with Grupo Modelo of Mexico (maker of Corona), in which Anheuser –Busch already has a 50% stake. While this strategy is being discussed a means to make a hostile takeover by InBev unpalatable, there is substantial speculation that InBev may like to swallow the Corona maker in the deal anyway. While InBev chief Carlos Brito seems opposed to further upping the deal, it seems unlikely that he would really balk at the opportunity.
The bottom line is that InBev is doing all the right things and making all the right noises. While politicians can volubly declare their opposition to the deal, the fact is that there’s really not much they can do about it as there are no substantial regulatory hurdles to such an acquisition. If Anheuser-Busch shareholders like the offer, that should pretty much be that. The Busch family controls less than 5% of the stock while Warren Buffett’s Berkshire Hathaway Inc., owns over 5% of shares and stands to make some USD $600 million on a three year investment in the company. The largest single shareholder, Barclay's PLC, with over 6% interest in the company, is unlikely to oppose a tidy profit.
“That Buffett is a clever chap. I haven’t been in beer shares for some time. With the economy on the way down, your booze portfolio should be in hard liquor. Beer may be relatively more affordable, but ‘liquor is quicker’ as they say. I can’t see Anheuser-Busch staving this bid off. A Grupo Modelo merger may put InBev off temporarily if they only have Board approval for a purchase in the $50 billion range, but Anheuser-Busch has not grown as aggressively as it should have internationally and this is the price it pays”, said the Bloated Plutocrat. The Bleeding Heart is still so angry with your Genteel Moderator over last week’s Big Oil vs Big Government post that he would not file written remarks. When I did speak with him over the phone, he insisted that “this is all because of NAFTA”. When I explained that the proposed InBev deal had nothing to do with NAFTA, he became very distraught and screamed that I didn’t understand international trade and that this was all just another unwanted side-effect of a free-trade policy. This is of course partly true. But if Anheuser-Busch were buying Tsing-Tao, I somehow doubt the Bleeding Heart would be railing against free trade…
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Thursday, June 12, 2008

Big Oil vs. Big Government

Nobody likes oil companies, except the Bloated Plutocrat of course. They are environmentally unfriendly. And they make way too much profit. Well, right now at least. The last “oil crisis” that I witnessed was rather different. In 1998 I was living in Dubai and the price of a barrel of oil dipped below $20. Persian Gulf governments were in a tizzy over the massive revenue shortfalls and falling budgets they were facing. There was talk of suing EU governments for the disproportionately high taxes that they imposed on the retail selling price of gasoline! North Sea rigs were set to shut because they couldn't produce at that price. Oil companies were losing money then. But ever since then they have made OBSCENE profits according to Barack Obama and his Senate Demagogues, sorry, Democratic colleagues, that introduced a piece of political hustle called The Consumer-First Energy Act of 2008, largely comprised of a 25% windfall profits tax on U.S. oil companies. While I agree that Exxon-Mobil’s first quarter earnings of $10.9 are pretty much obscene, it seems that over the past ten years, Exxon-Mobil and other US oil companies have reaped profits on par with the rest of US manufacturing companies – approximately 8 cents on the dollar invested. Oh. Fortunately the Bill is going nowhere.

Oil prices are high because the US won the Cold War and discredited Godless Communism, the economic aspects of which have been chucked out the window everywhere but North Korea and the London School of Economics, even if China and others maintain the political aspects of Marxism-Leninism that keep the ruling oligarchy in power. Meanwhile with even “socialism” a dirty word outside the retrograde South American countries that Venezuelan President Chavez has purchased with oil revenues, China and the formerly bumbling socialist India, Russia, and most of its former satellites are all witnessing strong economic growth rates based largely on the benefits of a free-market economic system and freer global trade regime that the US has championed pretty much since its independence from Britain. Gasoline costs $4.00 a gallon in the US because you bought that Made in China 64” Plasma Screen TV last year. The plant that made that TV has expanded fivefold in the last 9 months and the shift supervisor when your gargantuan teletheater was produced (he’s now Director of Operations) has upgraded from moped to Toyota sedan. Both these developments mean that more fuel is being used elsewhere in the world (as oposed to the 25% of global oil consumption in the US), driving up your pump prices at home. So when Senator Charles Schumer of New York spews lickspittle while screaming about oil company profits, it begs the question as to whether he, or any of his colleagues in the Senate, understands basic economics.

Mind you, McCain isn’t much better, but he’s marginally more honest about his grasp of economics. He and Senator Clinton’s proposals for a Federal gasoline tax holiday represented the worst kind of pandering. With McCain one hopes that it was at least partly driven by an orthodox view that cutting taxes is never a bad idea. He was at least honest when he almost, sort-of, admitted he was tax-cutting for votes. Clinton was just desperate, but compounded pandering with stupidity by proposing another windfall profits tax on Big Oil to fund her vote-soliciting gas tax holiday. But both of them should have realized that the best they could hope for would be that gasoline retailers would split the difference with consumers, resulting in a massive 9 cent per gallon price reduction (while prices are climbing). Offering gasoline retailers a potential 18 cent per gallon windfall wasn’t very smart. But it didn’t raise serious questions about the mental health of either Senator. Not so for the sponsors of The Consumer-First Energy Act of 2008. Oh, and Obama was opposed to the gas tax holiday. But he was in favor of it before he was against it. (In 2000, he supported a Bill in the Illinois legislature that would have temporarily suspended the state gas tax).

Who do you think would be victorious in the battle of wits between the Seven Mental Dwarves of the Senate (all of them named "Dopey") that sponsored this Bill and the Finance, Taxation , and Law Departments of America’s oil companies? Would such paragons of virtue as Sen. Harry Reid prevail as a latter day Mr. Smith against the rapine oil companies? Or would a 25% tax hike on US oil companies simply be passed on to the consumer, further driving up gas prices? I know which way I would bet. But Sen. Chuck Schumer was particularly irate that the authorization for the US Attorney General to sue OPEC producers for their “monopoly” powers included in the Bill should be voted down. The fact that the US remains one of the worlds Top Five oil producers (number 2 after Saudi Arabia by some measures) and that its single largest source of imported oil is Canada (not an OPEC member to the best of my knowledge) seem to have eluded Chuck.

Can we go back to Economics 101? Supply and Demand. Right now, demand for oil is extremely high at just under 87 million barrles per day. This is higher than markets had envisaged, but already showing signs of falling. New oil fields (and oil fields are being discovered as I write) as well as oil sources that are not profitable at lower prices (Canada’s Athabasca Tar Sands, for example) take time to come on line and meet this higher demand. Similarly, high fuel prices create inflation and slow economic growth as well as discourage oil consumption, which in turn brings down demand for oil. Within 18 months from now, the price of a barrel of oil will be back in the $90 - $100/bbl range. Perhaps the Seven Mental Dwarves who sponsored The Consumer-First Energy Act of 2008 should instead draft Senate guidelines requiring that members of the Senate have obtained a basic educational level that includes passing Econ 101. That of course would thin the Senate out considerably AND substantially diminish eligible candidates. Supply and Demand.

Sadly, the Bleeding Heart refused to speak with me or provide written remarks for this piece. He said that Your Genteel Moderator had gone too far, and that accusing Senate Democrats of stupidity (which I do, but do not believe is confined to the Democrats) and the high price of gas to the failure of Communism (which I do, but he resents, having done a junior year abroad at LSE) was “absolutely unacceptable”. The Bleeding Heart believes that his hybrid SUV is the answer to the oil crisis. The Bloated Plutocrat was unable to file comments. He is at an Exxon-Mobile Board meeting and invitational golf tournament…

PS – Your Genteel Moderator must confess to a degree of bias in this matter. I dislike oil companies. In early 1990 while still at University but looking for a job, I went to interview with Occidental Petroleum in Los Angeles. That day they let go more than 10,000 people. This was because oil prices were low and they were scaling back exploration and refining activities. They didn’t offer me a job.


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Thursday, June 5, 2008

Uh-Oh, Airline Re-regulation?

With jet fuel prices soaring and almost nothing left for airlines to cut (removing the seats altogether appears to have been too much for the FAA), it looks like it’s routes and jobs under the knife now. United announced substantial cuts earlier this week, grounding its 737 fleet, following previous moves by American some two weeks ago, and Continental is following with plans to cut routes and jobs as well. Expect similar moves from other US and international carriers in the near future. United has announced it will shed roughly 15% of its domestic seats on offer and American and Continental are in a similar range. Airline analysts have long talked about the need for domestic carriers to drop nearly 20% total seats on offer to regain profitability, so further cuts could be in order. So far, going back to Delta’s cuts at the end of 2007, most carriers have cut in the 12% - 15% range, but with fuel costs up over 80% in the last year, those cuts are likely to be seen as insufficient.

Despite the economic downturn/recession, demand for flights remains high, at this time. This means one thing. Expect rising fares on remaining routes. Of course should these fare increases work in tandem with further recession, we may see falling demand at some time in the future. That of course may lead to further route cuts, getting to a point where we have very limited service and high expense on a number of routes. But wait, we’ve been there before. Thirty years ago de-regulation was promoted to increase competitiveness in the industry and produce increased service and lower prices. Now after thirty years, and the coming and going of some 200 airlines in the US, the question of regulation is again under discussion.

Is it more regulation or less regulation that is needed to pull the airlines out of their slump? There’s definitely room for debate. On the one hand, deregulation did spur competition and lead to increased airline capacity and lower prices. This was undoubtedly good for consumers. Unfortunately, a lot of short-lived, predatory competitors emerged under de-regulation, rising on the scene under-capitalized, extracting fairly painful concessions from unions with a promise of a brighter future, slashing prices to generate passenger trial (and drive those stock prices up in the short term), and then going out with a whimper after being unable to sustain operations at rock-bottom prices. In the meantime, they succeeded in slashing total industry profitability and causing real pain at the major domestic carriers. If you think about it, have the US carriers ever been “well” since the so-called crisis of the First Gulf War? Of course, one of the major complaints inside the industry is over the 25% limit on ownership by foreign interests of domestic airlines. There is a view that these limits have diminished investment in the industry and contributed to the death by a thousand cuts inflicted by the small-cap, fly-by-night (had to work that in there somehow) come-and-go airlines.

“Limited re-regulation is the only long-term solution for an industry that is continually seeking government assistance," Robert Roach Jr., an executive with the International Association of Machinists and Aerospace Workers, said at a recent Senate Commerce Committee hearing on the state of the airline industry. James Little, international president of the Transport Workers Union of America, believes that to save the faltering airline industry, "I think the time has come for some kind of re-regulation… For labor, we need some kind of transition program, so that pension plans can be saved if there are mergers and acquisitions." With employees having born a substantial cost in the fight for competitiveness over the last decade, this call for some form of “re-regulation” will come as no surprise. Certainly few would argue that while de-regulation brought with it more flights at cheaper rates, it also brought diminished in-flight service and, overall, a less pleasant flying experience.

But hold on a minute. What is it that people want? Lot’s of cheap flights with admittedly Aeroflot levels of service, or fewer, more expensive flights pitched more at the Singapore Airlines level of service? Obviously what consumers want are cheap flights with fantastic amenities, but recognizing that this scenario is unrealistic, the answer is that what the country wants is lots of cheap flights. And in the post de-regulation era, that’s what it got. The result was a massive expansion in airline travel by Americans. According to the Bureau of Transport Statistics (please see last week’s Blog), in 1977, people paid for 149.5 million flights on US domestic airlines. In 2007, that number was 769 million. That growth (five times as many domestic seats sold in 2007) cannot be accounted for by population growth – or growth in corporate travel budgets. The fact is that America got what it wanted: cheap flights. The price it paid was horrible service, massive congestion, under-investment in infrastructure, and vicious competition.

The industry itself is not convinced that re-regulation is an answer, although government measures to limit competition under any other name would be most welcome. They would love to see higher barriers to entry for new airlines (diminishing the number of one route wonders that slash major carrier profits before disappearing in a Chapter 11 cloud), and would likely welcome measures that effectively establish minimum prices on certain less profitable routes (provided it isn’t actually called price controls). But mostly one hears about more deregulation: a freeze on government fees (have you looked at the fees and taxes section of you airfare lately – there’s a healthy tax-farming business afoot if nothing else); a reduction in fuel taxes (unlike the average motorist, a break on Avgas would add up); easing competition rules on airline M&As, and most of all; the removal of the 25% limit on foreign ownership of US airlines.

It is a point well made. There is virtually no other sector of the US economy in which this limit on foreign direct investment exists, certainly not one as mundane as cattle carting. The fact is that that sometime in the next year or so, Emirates Airlines of Dubai will become the world’s largest passenger carrier. Look at booked sales for Boeing and Airbus – the Middle East and Southeast Asia are leading the charts. If consolidation of the domestic industry is generally seen as a bad idea, then direct foreign investment or acquisition is the likely answer. There really are no legitimate security concerns and, before screaming blue murder, the unions should consider that most European airlines are used to much more costly deals with labor than the US unions can even imagine.

Predictably, the Bleeding Heart and Bloated Plutocrat had strong and widely variant views on the matter. “De-regulation was just another excess of the 80s. We saw the folly of big hair, shoulder pads, and Boy George, why can’t we accept that airline deregulation was a Gordon Gecko fantasy gone wild. The unions have been bled dry by successive agreements that saw them paying for bad corporate planning. With the fuel crisis and economic downturn, it’s time to reestablish a regulatory framework for the airlines that will ensure good service for consumers, better safety, and decent wages for airline employees”, said the Bleeding Heart. “Well, I’m torn”, noted the Bloated Plutocrat. “I’d love to get rid of all the commoners who fly and return to the days when flying was an enjoyable experience for the select few that could afford it. But it won’t happen. There’s no turning back the clock. All we’ll end up with is an inefficient, slightly expensive system in which large people in clothes that are too small for them continue to fly. No. Open the doors to foreign investment. When Singapore and Emirates are operating the New York – LA route, we’ll at least have a jolly good First Class service!”
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