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The Story Behind the $52 Billion Buyout |
| When an enterprising salesman named Eberhard Anheuser acquired a fledging brewery on Carondelet Street in St. Louis in 1852, he probably never dreamed that the business would be a national source of pride a century later -- or that a foreign rival would one day come knocking with a $52 billion buyout offer. But that's exactly what was etched into the history books. The iconic company was worth every penny. There's no doubt Anheuser-Busch is America's brewer, from its coast-to-coast distribution to its distinctive red, white and blue packaging. Whether it's a bar and grill, a backyard cookout, a baseball stadium or a Super Bowl party, odds are good you'll find the firm's flagship Budweiser beer in large quantities. Remarkably, the company controls a dominant 50% share of the domestic beer market -- leaving everybody else to fight over the other half. Anheuser-Busch's rise to the top in this $100 billion industry has yielded some important, telltale clues for investors. A powerful oligopoly of brewers produce about 90% of the 210 million barrels that are consumed each year. But the market wasn't always this concentrated -- far from it. In fact, there were more than 4,100 breweries in operation when Budweiser was introduced in 1876, the largest of which had a trivial 1.5% market share. Over the years, about 99% of those businesses either closed down or folded their assets in with a stronger competitor -- leaving Anheuser-Busch holding all the tap handles. So how did this remarkable transfer of power take place? Well, beer markets were highly localized in the 19th century. Most batches were shipped to neighborhood bars and taverns just a mile or two from where they were made. But Adolphus Busch (Anheuser's son-in-law) had a much grander vision than his contemporaries. First, he began pasteurizing his beer, which gave it a longer shelf life and thus allowed for distribution beyond nearby towns. And to make sure his products remained fresh, he pioneered the use of refrigerated railcars and icehouses to keep the beer chilled while in transit. Thanks to these innovations, the flourishing company began expanding its reach. At the same time, the entire industry was undergoing an unprecedented wave of consolidation as companies joined forces to create large syndicates. By 1910, the number of commercial brewers was down to 1,500, and many of those wouldn't survive prohibition. But Anheuser Busch emerged stronger than ever and began rapidly gaining ground on larger rivals like Schlitz. With clever marketing campaigns and growing production capacity, the firm took the lead in 1957 and hasn't looked back since. By 1980, annual output had reached the 50 million mark and management felt the time was right to list the firm's shares on the NYSE. At that point, there were less than 50 brewers still in operation and Budweiser was headed towards its coronation as "King of Beers." Of course, we all know the rest of the story. Today, millions of consumers associate the beechwood-aged lager with crisp, refreshing taste and fine craftsmanship. And management continually reinforces its brand image by reaching out to customers. The firm sends out its Clydesdales, encourages brewery tours, hands out free merchandise and point-of-sale promotional displays, and affiliates with popular sporting events. And with newfound appreciation for different styles and tastes, it has also launched dozens of premium products; old Eberhard might have been surprised to see a pumpkin spiced fall seasonal. Despite their best efforts, competitors just haven't been able to chip away at the firm's insurmountable lead. In fact, there are 1,525 brewers selling their wares today, and Anheuser-Busch is as large as the other 1,524 combined. Needless to say, sales and profits have ballooned over time. So what can investors learn from Anheuser-Busch? 1) Revenue. Anheuser-Busch wasn't a market leader on day one, but year after year it increased what it was taking in. To unearth other potential market leaders, look for 5-year growth rates or longer. 2) Operating Margins. It is a great thing to have more money coming in, but as the adage goes, "It's not what you make, it's what you earn." High operating margins make every dollar work a little harder for the company. 3) Wide Moats. Anheuser-Busch controlled nearly 50% of its market. That kind of control allows companies to be price makers, not price takers -- this can be leveraged into explosive growth for profits and share prices. -- Nathan Slaughter Editor Market Advisor P.S. Increased revenue... high operating margins... wide moats... every company wants them, but how can they get them? If you look closely at the most successful companies, you'll notice a common ingredient that helped propel them to the top. We call these ingredients "catalysts" -- and for Anheuser-Busch, they came in the form of innovation, a shifting industry, brand leadership and market dominance. The thing about catalysts is that some of them take longer than others to kick in. But when they do, the stock's share price can rocket in a hurry. So the idea is to find the stocks that are poised to benefit from important catalysts in the very near future. That's how a $4.50 stock can jump to $82 in just SIX WEEKS. |
