AB InBev agreed in June to buy the outstanding 50 percent of Modelo, Mexico’s largest beer maker, for $20.1 billion in a transaction that would marry Budweiser with brands including Corona Extra, Negra Modelo and Pacifico. In a related deal, Constellation Brands Inc. (STZ) plans to buy Modelo’s stake in Crown, the U.S. distribution joint venture of the two companies, for $1.85 billion.
The Justice Department “may be worried AB InBev will exercise indirect influence over Corona’s pricing policy in the U.S.,” said Trevor Stirling, an analyst at Sanford C. Bernstein. The brewer has “done what they had to do, which was construct the deal so it had a chance of getting through unscathed. However, they’ve probably got a Plan B.”
Deal Synergies
AB InBev said at the time the deal was announced that it expects annual synergy benefits of about $600 million. Any “significant remedies” could reduce the upside for AB InBev shareholders and reduce those benefits, Ian Shackleton, an analyst at Nomura in London, wrote in a note today. Nomura cut its recommendation on the stock to reduce from neutral.
AB InBev rose 0.9 percent to 67.24 euros at the close of trading in Brussels. Grupo Modelo gained as much as 1.1 percent to 113.84 pesos in Mexico City, while Constellation Brands climbed as much as 5.6 percent to $38.43 in New York.
The situation is fluid as the review by the antitrust division moves into the final stages and a decision isn’t expected for another three or four weeks, one of the people said. The Justice Department staff working on the transaction hasn’t yet submitted a formal recommendation to senior officials, another one of the people said.
Mexican Approval
Gina Talamona, a spokeswoman for the Justice Department, declined to comment. Laura Vallis, a spokeswoman for AB InBev in the U.S., Jennifer Shelley, a spokeswoman for Grupo Modelo, and Cheryl Gossin, a spokeswoman for Victor, New York-based Constellation, declined to comment, except to reiterate that they expect the deal to close this quarter.
Mexico’s antitrust regulator approved the transaction in November. AB InBev, which is based in Leuven, Belgium, controls 18 percent of the global beer market. Its Bud Light brand is the top selling U.S. beer and Modelo’s Corona is the top import.
Grupo Modelo, based in Mexico City, ranked fourth in the North American beer market in 2011 with a 5.5 percent share by volume, according to Bloomberg Industries and Euromonitor International. AB InBev ranked No. 1 with a 48 percent share of the market, far ahead of No. 2 Molson Coors Brewing Co. (TAP), which had 16 percent market share during the same period.
The New York Post reported Jan. 13 that the Justice Department could require the sale of some non-core U.S. brands by AB InBev. This would be a “manageable” remedy, “with the strategic rationale of the deal still compelling,” analysts including Dirk Van Vlaanderen at Jefferies Group Inc. wrote in a note today, reiterating their buy rating on the stock.
If the transaction is approved, the combined company would have revenue this year of about $47 billion.
“The real prize here is the Mexican business and the upside from restructuring it, as well as Corona’s international potential,” Stirling said. “They’re probably willing to compromise on the U.S. business.”
