AB-InBev revises synergy projection from Modelo deal upwards
On the face of it, AB-InBev’s executive suite does not seem to be all that concerned that they will have to relinquish a brewery and give up Modelo’s U.S. business entirely to receive regulatory approval for their USD 20 billion deal to buy the rest of Mexico’s Grupo Modelo that they don’t own yet.
As AB-InBev see it, they will receive USD 4.75 billion (EUR 3.6 billion) from Constellation for the remaining 50 percent interest in U.S. importer Crown and the Piedras Negras brewery and the perpetual brand licenses.
Ever bullish, AB-InBev actually said on 14 February 2013 that, having done their sums again, they think they can actually squeeze approximately USD 1.0 billion in synergies out of the Modelo deal – up from their previous estimates of USD 600 million. About 40 to 45 percent of the synergies should be realised from lowering costs, while 55 to 60 percent would come from lower selling, general and administrative expenses over the next three to four years.
Readers should take this announcement with a pinch of salt. Although "synergies" are part of the beauty of beer industry transactions, few outsiders are actually capable of verifying the usually given synergies projections. Besides, who is to say that AB-InBev’s original estimate was not purposefully low so that they could revise it upwards when needed to sway analysts and investors?
The announcement certainly did the trick as on the day it sent AB-InBev’s stock up more than 5 percent to USD 92.76 per share.
One thing is certain: AB-InBev’s interest in buying the other half of Mexico’s brewer Modelo had nothing to do with the U.S. market. No doubt, Corona and the rest of the Modelo brands in the U.S. mean big business and good profits. In 2012, Modelo’s beer sales in the U.S. topped 14 million hl for the first time according to beerinsights.com.
However, when it comes to growth prospects, Mexico and the rest of the world would have figured much more prominently on AB-InBev’s strategy sheet. Mexico is the number six beer market worldwide in terms of volumes, growing 14 percent to 65.5 million hl from 2005 to 2011, according to Impact Databank.
In Mexico’s tight beer duopoly, Modelo controls around 60 percent of the market compared with Heineken-owned FEMSA’s 40 percent. Beer is the most popular alcoholic beverage and per capita consumption stood at 61 litres in 2011, according to the Barth/Hansmaennel report. Add to that rather favourable demographics – 2 million people reach the legal drinking age of 18 every year – and you will perhaps understand why Mexico has been foremost on AB-InBev’s mind.
In terms of profits, Mexico already ranks as the world’s fourth-largest profit pool at USD 1.7 billion (EUR 1.3 billion) as measured in EBIT in 2011 behind the U.S., Brazil and Japan.
Guess how much in extra profits will AB-InBev be able to extract from Modelo once they can lay their hands on the business? Modelo’s EBITDA margin is not bad: AB-InBev forecasted a 33 percent EBITDA margin for 2012. But AB-InBev’s Brazilian unit AmBev does much better: 46 percent. It does not take much guessing which way Modelo will head once it receives the famous AB-InBev makeover: its margin and profits are sure set to rise.
The other thing that AB-InBev will do is to push the Corona brand globally. The brand currently holds the number one import ranking in 38 countries. AB-InBev see big potential for Corona to be a dominant global brand, alongside their flagship brand Budweiser, winning over beer drinkers in growing markets.
Losing the U.S. business to Constellation may be painful to AB-InBev but something they will be more than compensated for in the long run by Corona’s growth in and outside Mexico.
