Glenboden M & A Originations

Constellation vulnerable if ABI acquires Grupo Modelo

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Origination Status acquisition rumours, December 2010
Asset Grupo Modelo SAB de CV (Mexico), no.1 domestic beer group
Buyer Anheuser-Busch InBev SA (Belgium), no.1 global beer group
Seller founder families of Grupo Modelo breweries
Buyer Rationale Mexican market leadership, global consolidation, brands
Seller Rationale attractive valuation, failure of compensation claim
NBs ABI already owns 44% of the voting shares of Modelo, with a 50% economic interest
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There's speculation about A-B InBev acquiring the 50% of Mexico's Grupo Modelo that it doesn't yet own, to dominate in Mexican beer. We look at the consequences of that for troubled Constellation Brands in the US, who relies on Modelo staying independent.

Accounts for large chunk of profits ...Through Crown Imports, a 50:50 joint venture with Grupo Modelo, Constellation is the sole importer of Modelo's beer brands, including imported market leader 'Corona', into the US.

Booked by the equity method, Constellation's earnings from this JV came to US$ 222 mln in FY 2010. That adds to the group's US$ 312 mln in consolidated operating income.

So that JV, which is outside of Constellation's core wine & spirits business, accounted for around 40% of the group's earnings before interest and tax (after restructuring charges and asset write-downs).

... A-B InBev wants to buy Modelo 100% ... Meanwhile, 'upstairs', ABI has a 50% economic stake and 44% voting stake in Grupo Modelo itself; a legacy of InBev's acquisition of Anheuser-Busch in 2008.

Modelo has 60% market share in the world's sixth largest beer market, Mexico, and accounts for 90% of that country's beer exports. So it's a clear strategic target for a hungry ABI.

Also one of ABI's global competitors, Heineken, acquired FEMSA, the no.2 player in Mexico's beer duopoly, earlier in 2010. ABI needs to reciprocate by taking control of Modelo, to confirm its leadership in Latin America.

... will Modelo founders hold out ? ...ABI is strongly de-leveraging, after the massive Anheuser-Busch deal, using free cashflow and divestment proceeds (Oriental Brewery in South Korea; 25% stake in Tsingtao in China; central and south-east Europe brands all sold).

Using the Heineken -FEMSA deal as the comparator, we estimate the 50% controlling stake owned by the Modelo founders to be worth about US$ 11 bln (see valuation).

The 'founders' of Modelo are actually the descendants of the founders of the breweries which make up Modelo. They may find an offer from ABI hard to refuse.

... bad outcome for ConstellationEarlier in 2010, an arbitration panel ruled that ABI did not violate an agreement with Grupo Modelo, when it 'took over' Anheuser-Busch's stake in Modelo in 2008. That might clear the path for ABI to buy out the Modelo founders.

A successful bid would be bad news for Constellation, because ABI would almost certainly wish to terminate the Crown Imports joint-venture, in order to put Modelo's brands through its own US distribution.

In that case, Constellation's options might be to pursue change-of-ownership arbitration of its own, or to cry foul to the anti-monopoly regulators (see chart).

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THIS LEAD'S VALUATION
Size (€ mln) 8.300
Sector brewing
Asset Quality no.1 Mexico branded
Seller large plc
Buyer large plc
P/S 11,0
P/Ebitda 3,5
Type 50% enterprise value estimate
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