The spirit world may be in for a major churning as two of the biggest names come close to creating the biggest conglomerate of their kind, a $100 billion behemoth. The names involved are currently No.1 and No.4 in the brewing business – InBev and  Anheuser-Busch with annual revenues of $19.7 billion and $16.7 billion respectively. SABMiller and Heineken are No.2 and No.3, with revenues of $18.6 billion and $18 billion respectively. However, these positions are pretty dynamic considering the fluctuating currency exchange rates.

Now, No.1 is making a $46 billion bid for No.4 and reports indicate that it has already stitched up financing for the same, and some more. However, No.4 may not be very welcoming of being acquired, although the offer constitutes a $65 per share deal, a considerable premium over the latest market price.

The deal, if it materializes, will not only shake up the world of spirits but that of high finance in general. A combined entity would brew one-fourth of the world's beer and have a stronger hold over the rich American market; but more importantly, a coming together of the two names would also raise hopes across capital markets that the worst of the credit crisis may be over, a crisis which had already sounded the death knell of many possible buyouts which had collapsed as funding dried up. Thus, in a sense, a deal would mark the most important transaction since the bail-out of Bear Stearns by JPMorgan this year.

JPMorgan also features prominently in these discussions as well. If latest reports are to be believed, the acquiring entity,  InBev, has already arranged for funds for this massive deal, and the American bank is one of the two lenders. Santander of Spain is the other. However, InBev, JPMorgan and Sullivan Cromwell, the American law firm believed to be advising the Belgian brewer, all declined to comment. Neither did Lazard, the investment bank which is rumoured to be handling negotiations for InBev, say anything.

The share market, as expected, has reacted vigorously to this news. The Anheuser-Busch stock ended at $56.61 yesterday, a whopping 7.7 per cent or $4.03 over Thursday's close. However, InBev's shareholders were less enthusiastic and the price fell €1.44 to €48.88 in Friday trading.

InBev makes Beck's, Brahma, Stella Artois and Skol beers, and was itself created in 2004 when the Belgian company Interbrew and the Brazilian company AmBev merged, creating the world's largest brewer. . Reports of its interest in Anheuser-Busch have circulated for months. Anheuser-Busch makes Budweiser, Bud Light and other beers. The company has an estimated 51 per cent US domestic market share, where it is the undisputed No.1. InBev would like to leverage  Anheuser-Busch's prominence in the developed world to further its dominance in the developing world.

Wall Street experts also pointed out that a combination of the two brewers would make compelling business sense. While Anheuser-Busch has interests in China, Britain and Mexico, it derives 86 per cent of its revenues from America. On the other hand, InBev is the biggest brewer in the UK and continental Europe and has a strong South American presence, after its merger with AmBev, of Brazil. Such a combined group would have little geographical overlap.

The two companies already work together in America under an agreement whereby the US brewer distributes some of its Belgian rival's brands, including Beck's, Bass and Stella Artois.

A successful takeover would mark the latest phase of industry consolidation after European rivals Carlsberg and Heineken acquired Scottish & Newcastle in a $15.4 billion deal and SABMiller set up a joint US venture with Molson Coors. Miller and Coors are currently just behind Anheuser-Busch in the American beer market.(See: Carlsberg-Heineken to acquire S&N for $15.4 billion and  SABMiller, Molson Coors merging US brewery operations)

Anheuser-Busch itself is believed to have considered a bid for Scottish & Newcastle earlier this year with suggestions that the brewer appointed Goldman Sachs to study a potential offer. However, nothing materialized of that interest and Heineken snapped it up.

Inbev is understood to be prepared for Anheuser-Busch chief executive August Busch IV to try to block a takeover and is considering appealing directly to the company's board or shareholders. The Busch family has a stake of less than 4 per cent in the brewer, but has managed to retain indirect control of the company's board since Anheuser's inception in 1860. Billionaire investor Warren Buffett has a bigger share of the company with a 5 per cent stake. However, the current management is unlikely to give in without a fight.

Goldman Sachs Global Investment Research upgraded Anheuser-Busch to "neutral" from "sell," saying in a report on Friday that takeover speculation "is likely to support the stock near term." The report noted that the Busch family lacks voting control and there are no anti takeover measures, meaning that if InBev develops a proposal, the company's fate will be decided by the board of directors and shareholders.

The reception from Anheuser won't be InBev's only problem. It will have to persuade its own investors of the merits of a deal. A fall in InBev's share price yesterday suggests that won't be easy and rightly so. For Inbev, the acquisition would give it a market-leading US business but little to drive growth save a stake in China's leading brewer. Moreover, a hostile takeover may potentially drive up the price, a prospect very much unwelcome for InBev investors.

While rumours of a tie-up have been going on for 18 months, the speculation re-emerged after reports claiming that the decision to approach Anheuser had been discussed at an InBev board meeting on 28th April, and again this week.

Inbev is understood to be some way from making a formal offer but is thought to have been studying a takeover since last year. Acquiring Anheuser would give Inbev a number one position in the US beer market as well as a 50 per cent stake in Modelo, a leading Mexican beer company, and a 29 per cent holding in Tsingtao, the aforementioned Chinese brewer.