Anheuser-Busch Financing Grupo Modelo Purchase For Almost Free

Anheuser-Busch InBev (NYSE: BUD) may get to finance this purchase of the remaining interest in Grupo Modelo of $20.1 billion for somewhere close to free.  Of course this will not be entirely free, but a coming bond issuance is apparently getting so much demand that other companies need to pay attention here.  The company filed for a 4-part bond deal but the maturities and rate has not been set as of yet. Also, rivals such as Molson Coors Brewing Company (NYSE: TAP) and even Boston Beer Co. Inc. (NYSE: SAM) may want to pay close attention here in case they are eyeing some prey.

Dow Jones noted earlier that the beer giant (or its brokers) has received a whopping $26 billion worth of bond orders ahead of its offering.  Here is why we say that “Bud” can finance this deal for close to free: the company has not even formalized how large the bond issue will be.  We expect an issue of $3 billion to $5 billion but now the company could (and maybe even should) decide to leverage up. The use of proceeds is effectively to fund the deal: “The Issuer intends to apply substantially all of the net proceeds from the sale of the Notes to general corporate purposes and pre-funding of financing related to the announced combination with Grupo Modelo.”

Standard & Poor’s Ratings Services rates the beer giant as investment grade with an “A” rating after a recent upgrade from “A-” earlier this year. Fitch Ratings recently affirmed the beer giant’s Long-term Issuer Default Rating and senior unsecured rating at ‘A’ earlier this month after the Grupo Modelo acquisition was announced. Moody’s is also at an “A” rating.

The financing will of course not be free, but it could go off at a price premium or a lower spread than other “A” rated deals.  S&P just showed this week that the bond spreads for ‘AA’ credit tightened by 3 basis points 151 basis points and that the ‘A’ spread tightened 2 basis points to 194 basis points.  While that spread is not universal among all maturities, the 5-Year Treasury yield is only 0.62% and the 10-Year Treasury yield is only 1.5%.  What if Anheuser-Busch decided to go further out on the curve?  The 30-Year Treasury’s “Long Bond” now yields only 2.60%.

If the deal is really this much oversubscribed without even having been shown in detail, it is easy to assume that this “A” rating may actually price like a “AA” rating or at least with a narrower spread than many other “A” rated companies would pay.  It looks like the cost of financing might be as little as 2% to 3% per year.  If that is not close to free financing to lock up an acquisition of this caliber then what is?

JON C. OGG