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01 March 2013

Will AB-InBev’s sale of a Mexican brewery to Constellation appease U.S. regulators?

So this is AB-InBev’s Plan B. On 14 February 2013, AB-InBev announced that they will sell all of Grupo Modelo’s U.S. business to wine company Constellation. As part of the deal, AB-InBev have agreed to divest themselves of Modelo’s newest brewery in Mexico in Piedras Negras and grant perpetual licenses of Modelo’s brands to Constellation for USD 2.9 billion (EUR 2.2 billion).

This is on top of the already agreed upon sale of the 50 percent stake Modelo holds in U.S. importer Crown for USD 1.85 billion (EUR 1.4 billion).

In effect, should this deal receive regulatory approval, the Corona brand will have two owners: Constellation in the U.S. and AB-InBev in Mexico plus the rest of the world. This resembles the Foster’s situation. Today Heineken own the Foster’s brand in Europe while SABMiller own it in all other markets.

By providing Constellation with a brewery in Mexico and full control over Modelo’s brands in the U.S., including the popular Corona brand, AB-InBev will put another level of separation between themselves and Constellation. The move could lessen opportunities for pricing coordination between Constellation and AB-InBev, something the U.S. anti-trust body was worried about.

Moreover, it will not raise AB-InBev’s U.S. market share, currently at 46 percent. The U.S. Department of Justice had complained that, under the terms of the previous transaction between Constellation and AB-InBev, AB-InBev’s market share at least indirectly would have risen to over 50 percent, as all of Modelo’s brands in the U.S. enjoy about a 6 percent share of the market.

AB-InBev say that the revised transaction turns Crown from an importer into the number three brewer in the United States. For this Constellation will have to fork out USD 2.9 billion, which is based on an assumed 2012 EBITDA of USD 310 million (EUR 235 million) earned from manufacturing and licensing the Modelo brands for sale by the Crown joint venture, with an implied multiple of approximately 9 times.

AB-InBev and Constellation have also signed a three-year transition service agreement, during which Constellation will invest approximately USD 400 million to expand the Piedras Negras brewery, which will then supply 100 percent of Crown’s needs for the U.S. marketplace. The Piedras Negras brewery, which is conveniently located just minutes away from the Mexican-Texan border, covers about 60 percent of Crown’s current demand, AB-InBev say.

The new deal still requires regulatory approval in the U.S. and Mexico. According to media reports, the U.S. Department of Justice will give this proposal serious consideration, while continuing with its lawsuit against AB-InBev as announced in January 2013. So the whole saga could go on for a while still.

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