In our last review of brewing giant Anheuser-Busch (FAT125), we discussed our view that the impending takeover by Belgian brewer Inbev would proceed. Inbev already had financing in place and we did not anticipate serious regulatory opposition to the deal. Indeed, the final hurdle was simply for Anheuser’s shareholders to vote in favor of the transaction next month.

Today however, BUD’s current stock price of $60 is considerably below Inbev’s $70 offer price. The market is clearly pricing in a considerable chance that the deal will not eventuate any time soon, based largely on the current stock and credit market turmoil. This week we examine the probability that the deal will occur and explain why we believe it is prudent to take some money off the table.

Of the total $52 billion purchase price, Inbev had planned to raise $9.8 billion through an equity issue. However, Inbev’s stock price has fallen to around 3 year lows since the deal’s announcement earlier this year. This has the effect of forcing Inbev to issue more shares in order to raise the necessary capital. As a result, Inbev has opted to put their prospective rights issue on the backburner until markets stabilize.

Inbev’s management has stated that the delay won’t halt the deal, which they still expect to complete by the end of the year. In lieu of the rights issue, they have raised an “equity bridge loan” which must be repaid within six months following the merger. We certainly expect the current level of market volatility to have subsided by then. However, it seems unnecessary for Inbev to commit to a short-term debt maturity given the current climate.

Furthermore, Anheuser-Busch already holds a considerable amount of debt on their balance sheet. As such, Inbev are likely to carve off various non-core assets following the deal in order to pay down the combined company’s debt. And as Members would be aware, the current market environment is far from conducive to asset sales.

Meanwhile, the US dollar’s recent strength increases the price that non-US buyers must pay for American companies. There is at least some good news on this front. Inbev have hedged their currency exchange rate in relation to the rights issue at 1.54 dollars to the euro, compared to the current rate of around 1.35 dollars to the euro. The company has also locked in an interest rate of 3.875 percent on $34.5 billion of debt.

The fact remains though that a number of the banks lined up to finance the deal are embroiled in the current round of bailouts and writedowns. It is therefore difficult to have certainty that the financing will remain available to Inbev without the attachment of more onerous terms. And given the other factors outlined above, our confidence in the deal’s likely completion this year has diminished considerably.

Turning to Anheuser-Busch themselves, the company recently released a preview of their forthcoming third quarter results which revealed solid growth in beer sales. Wholesale sales were up 2.3 percent while shipments to retailers expanded by 3.6 percent. Furthermore, the company has been initiating price increases across their product range. This is testament to the defensive characteristics of Anheuser’s earnings. Consumers still reach for the beer bottle even during a slowdown – perhaps more so.

From a valuation perspective, the company trades on a ratio of 19 times consensus 2008 earnings, falling to 16 times 2009 earnings. Although consensus estimates are likely to be downgraded across the market in order to reflect the recessionary outlook, Anheuser’s defensive earnings should soften the blow on this front.

On the charts, the takeover offer of $70 a share has clearly distorted the charting outlook. Although the offer remains on the table, BUD has retreated from the August high of $68.58, recently touching a low of $56.20.

Given the substantial increase in volatility and the profits already achieved on this investment, we now favor lightening our exposure. Although significant support lies in the region of prior highs at $55, failure to hold above here would open the door to a deeper retreat towards the major low of 2007, at $45.55. We therefore believe it would be prudent to lock in a portion of existing profits by selling half of our holding in BUD at around $59.95.