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Budweiser: Quick 11% Gain Brewin'?

Kevin Baker

During a recession, a stock portfolio that's overweight in health care, consumer staples and utility sector stocks may provide some cover from larger losses. Unfortunately, during panic-selling, no stock investment is truly immune.

Within the consumer staples sector, there is one beverage company that's rated A+ by our model and poised to soar as much as 11% by year's end. That stock is Anheuser-Busch (BUD Quote).

Belgium-based InBev NV has agreed to buy this American brewer for $70 a share in a deal expected to close by Dec. 31.

If the acquisition goes through as planned, the Bud shares would be cashed out at $70 each, a premium of 11% from their current level around $63. On the other hand, if the deal fails, the stock could drop back to trading levels in the $50 to $55 range or lower.

Anheuser-Busch increased its third-quarter beer sales to U.S. retailers by 3.6% and its shipments to wholesalers by 2.3%. In its preliminary third-quarter results, Bud said it expects revenue per barrel to rise 4%. That's slightly more than the expansion in its costs of goods sold per barrel, heralding wider gross margins.

InBev investors voted to approve the merger back on Sept. 29, and Anheuser-Busch shareholders get their say on Nov. 12. Bud's board is in favor of this friendly bid, so barring a regulatory or shareholder surprise, the biggest question is, "Can InBev raise the money?"

Even though it is the world's largest brewer, InBev didn't have all of the $60.8 billion needed to purchase Anheuser-Busch. So InBev arranged to borrow $45 billion from a syndicate of banks including Bank of Tokyo-Mitsubishi (MTU Quote), Banco Santander (STD Quote), Barclays Capital (BCS Quote), BNP Paribas (BNPQY Quote), Deutsche Bank (DB Quote), ING Groep (ING Quote), JPMorgan Chase (JPM Quote), Mizuho (MFG Quote), Fortis Bank and the Royal Bank of Scotland (RBS Quote).

Fortis has since been taken over by the Dutch government and the other banks are working their way through the current credit crunch, which partially explains the decline in Bud stock since mid-September. If the banks come through with the financing, Anheuser-Busch stock will likely jump back to the purchase price of $70 in a hurry.

BUD: Poised to Break Out or Down

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Source: Bloomberg

As with any trading strategy, including betting on acquisition deals, you can lose money. Before placing any trade, it is best to know how much downside risk you can stomach and attempt to limit your risk by placing your stop-loss orders to help protect you from sudden moves against your positions.

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