Anheuser-Busch InBev NV, the world’s biggest brewer, offered to cede full control of Corona distribution in the U.S. to Constellation Brands Inc. (STZ) for $2.9 billion in a bid to salvage its purchase of Grupo Modelo after U.S. regulators sued to block the deal.
Constellation will gain Modelo’s brewery in Piedras Negras, which is located in Mexico near the Texas border, and perpetual rights for the Corona and Modelo brands in the U.S., Leuven, Belgium-based AB InBev said today in a statement.
The deal is aimed at appeasing U.S. authorities, who sued to block AB InBev’s proposed $20.1 billion purchase of the rest of Modelo on Jan. 31, arguing the merger would hurt competition and lead to higher prices. AB InBev controls almost half the U.S. beer market, while Corona is the country’s biggest imported brand. The complaint triggered plunges in shares of AB InBev, Constellation and Modelo.
“Corona in the U.S. was the jewel that they had to sell,” said Trevor Stirling, an analyst at Sanford C. Bernstein. “The real prize was getting access to Mexico.” The terms of the proposed merger of AB InBev and Grupo Modelo are unchanged.
AB InBev shares rose as much as 6.1 percent to 69.72 euros in Brussels trading, the steepest gain since Aug. 1. The stock traded at 69.70 euros as of 1:38 p.m., almost back to where it was before the U.S. sued to block the Modelo purchase.
DoJ Response
The sale to Constellation addresses “all of the concerns” presented by the government, the Budweiser maker said today. Selling the Piedras Negras brewery will ensure independence of supply for Crown Imports LLC, a joint venture between Modelo and Constellation. AB InBev had earlier agreed to sell Modelo’s 50 percent stake in Crown to Constellation for $1.85 billion.
The Department of Justice would give any proposal “serious consideration,” while at the same time continuing to prepare for litigation, spokeswoman Gina Talamona said by e-mail. She said she isn’t able to comment on specific proposals.
“This is a unilateral move that should resolve a big part of the DoJ’s concerns, but not entirely because it doesn’t address the loss of Modelo as a so-called ‘maverick’ competitor whose effect on the market was to keep prices down,” said Allen Grunes, an antitrust lawyer with Brownstein Hyatt Farber Schreck LLP in Washington who isn’t involved in the case.
Dirk Van Vlaanderen, an analyst at Jefferies International in London, said he expects the deal to proceed because the companies have addressed the Department of Justice’s concerns.
Synergy Benefits
Buying the rest of the Mexican brewer will lead to $1 billion of revenue and cost benefits, AB InBev said today, higher than a previous forecast of $600 million.
“This is a very positive sign as some had feared that the sale of Piedras Negras would undermine the cost synergy potential for ABI in Mexico,” Melissa Earlam, an analyst at UBS AG in London, said today in a note to clients.
The Belgian company agreed to buy the 50 percent of Modelo it didn’t own in June 2012, seeking to increase its penetration of emerging markets. The merger remains subject to the challenge by the U.S. and the revised agreement with Constellation is conditional on that approval.
Beer sales are rising at a faster pace in Mexico than in developed economies such as the U.S., the world’s second-biggest beer market by volume after China. Mexico is the world’s fourth- biggest profit pool for beer companies.
‘About Mexico’
“The AB InBev and Grupo Modelo transaction has always been about Mexico and making Corona more global in all markets other than the U.S.,” AB InBev Chief Executive Officer Carlos Brito said in the statement.
Constellation plans to invest about $400 million to expand the Piedras Negras brewery, which produces Corona, Corona Light and Modelo Especial, allowing it to supply all of Crown’s needs for the U.S. market. The new deal also removes an option that AB InBev had to terminate the importer agreement with Crown.
“This is a transformational acquisition for our company,” Constellation CEO Rob Sands said in the statement.
The price is based on assumed earnings before interest, taxes, depreciation and amortization of $310 million earned in 2012 from manufacturing and licensing the Modelo brands, AB InBev said. That gives an implied purchase multiple of about 9 times, which Jefferies’ Van Vlaanderen described as “fair.”
Bass Parallel
The Belgian brewer’s original agreement to buy the rest of Modelo was at a multiple of 12.9 times Ebitda, reducing to 10.8 times after the sale of the Crown stake and synergy benefits.
The deal proposed today isn’t the first time that AB InBev has offered concessions to get a takeover past regulators. In 2000, the company, then known as Interbrew, spent $4 billion on Whitbread Plc’s brewing business and Bass Plc, before U.K. antitrust authorities intervened. It eventually won approval for the Bass purchase by selling its English business that produced Carling, a brand with 19 percent of the U.K. market at the time.
In InBev NV.’s $52 billion takeover of Budweiser-maker Anheuser Busch Cos. in 2008, the largest brewing deal in history, the new entity had to sell Labatt’s operations in the U.S. to soothe regulators.
Constellation has fully committed bridge financing in place, AB InBev said. Permanent financing is expected to be a combination of senior notes and term loans, it said. That will bring its ratio of debt to earnings before interest, taxes, depreciation and amortization to between 5 and 5.5 times. The company plans to use its free cash flow to lower that ratio to its target of between 3 and 4 times “as soon as possible.”
Lazard acted as adviser to AB InBev.
Source: Bloomberg