InBev-Grupo Modelo Deal: Everybody Wins

by Will Ashworth | June 28, 2012 6:15 am

By now it’s old news that Anheuser-Busch InBev (NYSE:BUD[1]) is in talks to buy the controlling stake[2] in Mexico’s Grupo Modelo (PINK:GPMCY[3]), producers of Corona beer, the No. 1 beer import in the U.S. The value of the deal is impossible to guess — numbers range from $12 billion to $20 billion — and there’s no doubt it’s high-profile.

The question, though, is who benefits the most from following through.

The first part to this question is which party needs the deal more. The answer: Anheuser-Busch.

Mexico is the world’s sixth-largest beer market. Heineken (PINK:HINKY[4]) has held 100% of the beer operations of Fomento Economico Mexicano SAB (NYSE:FMX[5]) — or simply Femsa — since July 2010 when it completed its deal to buy the maker of the Dos Equis and Sol brands, among others, for $7.6 billion in stock. Femsa now focuses its attention on Coca-Cola Femsa (NYSE:KOF[6]) and Oxxo convenience stores while still holding 20% of the world’s third-largest brewer.

Femsa’s in the catbird seat; however, every day that passes without BUD owning the whole enchilada is a dire one for InBev’s shareholders. Emerging markets and craft beers in the U.S. are the only growth areas in the beer business[7], and BUD is losing out.

Some suggest BUD will try to work a deal similar to Femsa’s where Grupo Modelo shareholders receive a smaller piece of a much larger company. It’s great in theory.

The difference is that Femsa had other assets to keep itself busy after extracting itself from the daily grind in the beer business, while Grupo Modelo doesn’t have that luxury. Its non-beer revenues total around 7.8% of the overall sales. Like the lifeboats on the Titanic, there won’t be enough work to go around.

Why sell to a group you already despise when you can stay in the game, earn an amazing living and ensure that your beers don’t turn into a big joke like so many of BUD’s products?

An indirect winner if this deal goes through is Boston Beer Co. (NYSE:SAM[8]), the biggest craft brewer in America. After a deal is done — if it’s done — premium beer makers will become more attractive to the big boys of brewing. Sam Adams is going to be bought out, it’s just a matter of when. If BUD is willing to pay $20 billion to own 100% of Grupo Modelo, somebody ought to be willing to pay $2.8 billion for beer that actually tastes good. Jim Koch is sitting pretty.

Another big indirect winner in this expensive game of chicken is Constellation Brands (NYSE:STZ[9]), which stands to receive $1.7 billion from Grupo Modelo in exchange for control of Crown Imports, which has been importing the Corona/Modelo portfolio for 15 years.

Constellation needs to continue narrowing and bettering its product line. This infusion of cash allows it to get out of the beer business and further into the premium wine and spirits business, where the margins are better. Its wines are already strong, but the company needs a lot of work on the spirits side — and this could really help.

Rumors suggest a deal between the companies could be done by week’s end. If so, Anheuser-Busch will gain a very valuable asset and Grupo Modelo’s controlling shareholders will receive a king’s ransom to let go of their prized possession.

Frankly, if it goes for less than $15 billion, you have to think BUD got a steal. Somehow, I don’t think the Mexicans are going to let it go without a fight — and without more money.

In the end, it look like everyone wins.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Endnotes:
  1. BUD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BUD
  2. talks to buy the controlling stake: http://www.latimes.com/business/money/la-fi-mo-anheuserbusch-grupo-modelo-deal-20120625,0,1525670.story
  3. GPMCY: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPMCY
  4. HINKY: http://studio-5.financialcontent.com/investplace/quote?Symbol=HINKY
  5. FMX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FMX
  6. KOF: http://studio-5.financialcontent.com/investplace/quote?Symbol=KOF
  7. the only growth areas in the beer business: http://investorplace.com/2012/06/big-beer-brands-looking-abroad-for-growth/
  8. SAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAM
  9. STZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=STZ

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