The Wall Street Journal-20080201-Anheuser-Busch Dances With InBev- Tie-Up Holds Appeal- But Hitches Abound- Waiting on a Corona-

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Anheuser-Busch Dances With InBev; Tie-Up Holds Appeal, But Hitches Abound; Waiting on a Corona?

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After months of courting, beer giants Carlsberg A/S and Heineken NV last week finally talked Scottish & Newcastle PLC into selling itself in a $15.4 billion deal.

Now other titans in the fast-consolidating brewing industry may be looking for dance partners. One enticing possibility: Belgian- Brazilian InBev SA and Anheuser-Busch Cos. of the U.S.

InBev and Anheuser already have held discussions, say people in the industry familiar with both brewers' thinking. Although reports of the talks surfaced as long as a year ago, they have become more serious, and a deal is possible this year, people in the industry say.

Yesterday, Anheuser declined to discuss speculation of a deal with InBev. But the company reported fourth-quarter financial results that underscored why some analysts believe it may want a merger. U.S. beer sales to retailers rose only 1.3% by volume, with the growth coming from import brands rather than Anheuser's domestic brews. Fourth- quarter profit rose 12% on an 8% increase in net sales.

Industry consolidation has recently taken on new urgency as brewers wrestle with sluggish growth in big markets like the U.S. and Western Europe and rising prices for key commodities like barley and aluminum.

Heineken and Carlsberg agreed to break up Scottish & Newcastle, giving Carlsberg a fast-growing Russian venture it now shares with Scottish & Newcastle. London's SABMiller PLC, the world's second- largest brewer by volume after InBev, and Molson Coors Brewing Co. plan to combine their U.S. units, giving them 30% of the U.S. market. (Anheuser has nearly half.)

The prospect of a deal between InBev and Anheuser, the world's No. 3 brewer, is only slightly reflected in their share prices. There are reasons for caution, including weak credit markets, high commodity prices and the pitfalls of merging two headstrong management teams, analysts say. And St. Louis-based Anheuser is hardly desperate to be bought -- because the company controls nearly half the U.S. beer market, the world's most profitable.

If the brewers combined, their shares would gain but not more than 10%, analysts say. "Beer mergers are very expensive, so shareholders would have to be patient before they saw a real payoff," says Karel Zoete, an analyst with Amsterdam-based Rabo Securities.

In Brussels, InBev gained 2.61 euros, or 5%, to 54.85 euros ($81.63). The price has been rebounding from last week's market tumbles. In 4 p.m. composite trading on the New York Stock Exchange, Anheuser's shares were down 76 cents, or 1.6%, at $46.50, after hitting a 52-week low at $46.09.

Still, the long-term growth prospects of a combined Anheuser-InBev company seem intriguing. "You'd get winners on both sides," says Andrea Puccini, a fund manager for Fideuram Asset Management Ltd., a division of Rome's Banca Fideuram, which owns shares in InBev.

In an InBev-Anheuser tie-up, the new megabrewer would benefit from InBev Chief Executive Carlos Brito's hard-charging Brazilian sales and marketing team. Mr. Brito makes his executives build every budget from scratch, putting pressure on them to keep costs low.

Much of Anheuser's sales growth last year came from an alliance it began last year with InBev. It imports about 20 InBev-made European beers, including Stella Artois and Beck's.

With a market value of about $50 billion, InBev may be the only beer company big enough to digest Anheuser, which has a market capitalization of about $35 billion, analysts say. In addition, the companies don't have market overlap that would pose a problem for competition authorities in the U.S. or European Union.

It isn't clear what form any deal might take. Analysts say it would likely involve a complex share swap similar to that pulled off when Belgium's Interbrew SA merged with Brazil's Ambev, formally known as Companhia de Bebidas das Americas, in 2004, to form InBev. The result could be a merger in which It could give InBev, with the higher market value, a slight upper hand.

A deal would enable InBev to beef up its relatively weak presence in the U.S. at a time when its Belgian brands like Stella Artois are increasingly popular in many global markets. Anheuser, meanwhile, would gain, while giving Anheuser a huge overseas partner with a strong presence in emerging markets after years of passing up many deals outside the U.S.

Anheuser has been studying potential alliances, says Chief Executive August A. Busch IV, though he declines to discuss specifics. The U.S. dollar's weakness against other currencies "makes the international acquisition game tough for us, but could make it easier for others that want to take opportunities within the U.S.," he notes. Analysts estimate the Busch family owns less than 4% of the company's stock, not enough to thwart a deal shareholders wanted.

But there isn't any urgency for Anheuser to do a deal with InBev, and the brewer may want to bide its time on an InBev deal, says Carlos Laboy, an analyst with Credit Suisse. One reason, he says: Anheuser may have a chance in the next few years to buy a controlling stake in Mexico's Grupo Modelo SA, the maker of Corona Extra, which would provide significant growth opportunities. Anheuser already owns 50% of Grupo Modelo.

Anheuser said it won't discuss deal speculation of any deal with InBev or any other company. An InBev spokeswoman declined to comment, as did Grupo Modelo.