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Free beer??? BUD Price Spread (BUD)

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September 18, 2008 – Comments (3) | RELATED TICKERS: BUD

Back in July, InBev launched a $65 per share take over offer for Anheuser Busch (BUD).  After negotiating, the offer was bumped to $70 and accepted.  Both boards agreed to the takeover, InBev had financing lined up and the deal looked good to go. 

The chart below clearly shows how BUD stock price reacted as the story developed. 

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As rumors about a deal spread, the stock traded in the low $60s.  After the $65 offer hit the news, the stock traded up above that price indicating expectations of a higher priced deal.  When the deal was finalized at $70, the stock price quickly ran up to trade within a few percent of the deal and stayed in a very narrow range until a couple days ago.  The spread between the offer price and market price has now widened considerably. 

For someone willing to take the risk of the deal falling apart, there’s a 6.5% gain from Thursday’s closing price.  A deal closing date hasn’t been announced yet, so there’s no way to annualize the rate, but I can’t imagine it would take longer than a few more months to close.  BUD hasn’t announced whether or not they’ll make the next dividend payment should the deal drag out that long.  That would up the return just a bit more. 

The downside risk if the deal were to fall apart is substantial.  BUD was trading in the high $40’s before deal rumors started swirling and if the buyout doesn’t materialize, there’s nothing to keep the stock from taking a nearly $20 haircut. 

This could just be the result of the market’s high volatility over the past few days.  Or it may signal that investors are starting to have some doubts about the deal.  One possibility is tight credit markets may be causing some concerns about the $50 billion in financing InBev has lined up. 

There’s nothing in the news and the risk/reward ratio still indicates high expectations of this deal closing as announced.  However, the widening spread is indicating there may be a few doubts developing about hitching the Clydesdales to InBev.

 

3 Comments – Post Your Own

#1) On September 19, 2008 at 11:34 AM, TMFAleph1 (94.95) wrote:

Good post. You manifestly have an interest in risk arbitrage also. Nice writing, too!

Alex Dumortier (XMFMarathonMan)

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#2) On September 19, 2008 at 1:10 PM, rd80 (98.38) wrote:

Hi Alex.  Thanks for the comment.   It is kind of interesting to try and decipher what's behind the arb spreads. 

I followed the RIG - GSF merger pretty closely last year.  Owned GSF and wanted to add to the position.  By following the arb spread I could tell whether I was better off buying GSF or RIG.  GSF was consistently a few points cheaper through the whole process.

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#3) On September 22, 2008 at 7:31 PM, pjani06 (29.11) wrote:

Rd,

Thanks for throwing up the analysis.  I've enjoyed following you here on CAPs and today, I was brought out of apathy to post my first blog post - hitting on the financial system crisis.  check it, think about it, & discuss/circulate the ideas.

Here's the link:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=89802&t=01005302674505139157

Thanks.  Report this comment

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