AB-InBev buys Grupo Modelo – or the rest it does not own yet
At long last. AB-InBev said on 29 June 2012 that it had reached agreement with Grupo Modelo's closely-tied family shareholders which allows it to swallow the half of the leading Mexican brewer it does not already own for USD 20.1 billion or 12.9 times EBITDA before disposals.
The deal is logical, well-priced and cleverly structured.
AB-InBev inherited a 50.4 percent - but non-controlling - stake in Modelo when InBev bought Anheuser-Busch for about USD 52 billion in 2008. The enlarged group had hoped to mop up the rest of the Mexican brewer, but the controlling families launched arbitration proceedings, claiming that the deal broke an agreement that Modelo should be consulted over any change in control of the stake. The arbitration panel ruled in favour of AB-InBev in 2010.
For the sake of appearances, Modelo's CEO Carlos Fernandez has been saying for several years that the controlling shareholders are not interested in selling their stake to partner AB-InBev but these claims have always had a false ring to them.
Readers will remember that Grupo Modelo was quite willing to succumb to an offer by Anheuser-Busch in 2008, when the U.S. brewer was besieged by InBev. At the time, Anheuser-Busch hoped that gobbling up Modelo would make it too big to be taken over by InBev. In the end, the talks came to nothing because August Busch III changed his mind and took InBev's money instead.
Over the past few years, Grupo Modelo has become an even more attractive target. Mexico's per capita beer consumption is growing at about 3 percent annually. Already it is the world's number four beer market behind the U.S., Japan and Brazil in terms of total profits. In 2011, the total beer profit pool stood at USD 1.7 billion, AB-InBev said at the investor conference.
Grupo Modelo, which produced 56 million hl beer last year, is the leader in the Mexican market with a share of 59 percent. Its sole competitor is FEMSA, which is owned by Heineken.
What makes Grupo Modelo even more of a prized asset is its brand Corona Extra. 12.7 million hl of Corona were exported in 2011 Carlos Brito, CEO of AB-InBev said. Corona is the major import brand in the U.S. and it is well positioned among the top ten international premium beer brands. Exports helped Grupo Modelo to total sales of USD 6.4 billion last year and an EBITDA of USD 2.1 billion.
Through the full takeover of Grupo Modelo, AB-InBev will own four of the world's ten major international premium brands (Corona, Budweiser, Stella Artois, and Beck's) - a fact that will not be lost on the analysts.
The reason AB-InBev has had to wait until now to make a final move on Modelo, although its top brass have sat on Modelo's board for the past four years, is money. AB-InBev first had to pay down debt from the Anheuser-Busch deal before it could afford Modelo. The Mexican shareholders were in no rush to sell. All of them being wealthy individuals, they saw no need to accept a rock-bottom offer.
AB-InBev is paying USD 9.15 per share in cash which represents a premium of 30 percent to the closing price of Modelo's shares on 22 June 2012. AB-InBev said it has added USD 14 billion of new bank loans to fund the all-cash transaction, adding that it will reduce its net debt/core profit (EBITDA) ratio to 2.0 times during 2014.
Over the next four years, AB-InBev expects to reap cost savings to the order of at least USD 600 million a year. Given AB-InBev's phenomenal track record of cost-cutting at Anheuser-Busch, it's likely that the savings will be higher.
AB-InBev would not say who is going to lead Modelo in the future. Modelo's CEO Carlos Fernández and fellow shareholders María Asunción Aramburuzabala and Valentín Díez Morodo will continue to play "an important role" on Grupo Modelo’s board of directors, Mr Brito said. Two of Grupo Modelo’s board members will join AB InBev’s board - AB-InBev did not say who - and they have committed to invest USD 1.5 billion of their proceeds from the sale into shares of AB-InBev.
The new and bigger AB-InBev will produce about 400 million hl beer a year, with estimated revenues of USD 47 billion and EBITDA of USD 18 million.
To avoid the wrath of the U.S. anti-trust authorities, Grupo Modelo will sell its 50 percent stake in Crown Imports, its import vehicle in the U.S., to partner Constellation Brands, a listed wine company. Constellation will pay Modelo USD 1.85 billion for the Crown business, whose profits were USD 400 million last year (EBITDA), Felipe Dutra, CFO of AB-InBev said.
Crown Imports distributes Modelo beers in the U.S. in a deal that runs to the end of 2016, it was reported. The agreement between AB-Inbev and Constellation provides AB-InBev with the right, but not the obligation, to exercise a call option for 100 percent of Crown every ten years at a fixed multiple of 13 times EBIT, subject to regulatory approval.
Had Modelo not sold its stake in Crown Imports, the combined Modelo-AB-InBev market share in the U.S. would have risen to perhaps 56 percent, leading to anti-trust concerns.
In any case, the sale to Constellation allows AB-InBev to organise Modelo as it deems fit and decide in a few years' time what to do about its U.S. licence for Corona. Concerning the other international licences for Corona - the brand is sold in 180 countries - Mr Brito said that AB-InBev would respect them. But he also admitted that AB-InBev never had access to these contracts, not even during the recent due diligence process, which could be interpreted as another nod to the U.S. anti-trust authorities.
The transaction is expected to close in the first quarter of 2013.
