Wednesday, November 12, 2008

Anheuser-Busch Companies (BUD): A Special Situation

Today a great American icon passed into the hands of Europeans:

Shareholders of Anheuser-Busch Cos. Inc. on Wednesday approved the $52 billion sale of the nation's largest brewer to Belgium-based InBev SA, a deal that is set to create the world's largest brewer.

My play: This is a merger-arbitrage special situation. I sold Jan 10 puts (the longest time horizon available) on BUD at 30. Why am I betting that BUD won't drop to that level even though the U.S. market is in serious bear territory? Because this is an all-cash offer at $70/share; because InBev has the cash on hand right now; becuase the shareholders of both companies have approved the deal; and because BUD hasn't touched 30 (adjusted) since June 2000. This fully funded all-cash offer has supported BUD's share price throughout the volatility of the past several months, and I believe my short options will expire worthless by the end of this year when the merger closes.

Normally I would have sold uncovered calls on BUD at a price above 70, but those have disappeared by now. I went with Plan B to get a little bit of cash.

Nota bene: Anthony J. Alfidi holds short puts on BUD at the time of this commentary's publication.