Fitch: Anheuser's Full Control of Modelo Makes Sense

  Fitch: Anheuser's Full Control of Modelo Makes Sense

Business Wire

NEW YORK & CHICAGO -- June 25, 2012

Fitch Ratings believes that achievement of full control of Grupo Modelo by
Anheuser Busch InBev NV/SA (ABI, rated 'A/F1' with a Stable Rating Outlook)
makes good strategic and economic sense. The move would enhance the value of
ABI's existing 50% stake in Grupo Modelo by providing scope for integration
into ABI's organization. Thus far, the benefits for ABI have been limited to a
stream of dividends.

Grupo Modelo's operations are focused in the highly profitable, duopolistic
market of Mexico, where ABI does not have a presence, and in the U.S. While
ABI is the leading beer company in the U.S., Modelo is stronger in the
imported beer category where ABI has only recently started making meaningful
inroads. Modelo's products are distributed in the U.S. by Constellation Brands
(Constellation, rated 'BB+' with a Stable Rating Outlook) via its Crown
Imports, LLC joint venture.

We note that Grupo Modelo's leading market share of 56% in the large Mexican
market and its healthy EBITDA margin of close to 30% characterize it as an
attractive acquisition target in the consolidating global beer industry.

If ABI chose to finance the potential Modelo transaction with debt, we
calculate a $10 billion to $12 billion disbursement would cause its annualized
leverage to deteriorate (on a lease adjusted net debt/operating EBITDAR basis)
by no more than 0.3x-0.5x against our expectation that this metric would reach
approximately 2.0x for 2012. That said, this metric has the potential to
decline towards 2.0x in the second full year of the transaction, although it
would in the first year marginally exceed the parameters compatible with ABI's
current 'A' rating and fully absorb the company's rating headroom. However,
this calculation does not include any payments to Constellation Brands for the
purpose of terminating Modelo's current distribution agreements in the U.S.

As a result of the transaction, Fitch would also evaluate the credit
implications for Constellation. Constellation is entitled to eight times
one-year EBIT of its share in Crown Imports in the event of a termination of
the joint venture due to a change of control. The firm could use such payments
for debt reduction.

Merger and acquisition risk remains a core feature of the alcoholic beverage
sector. This transaction would follow ABI's announcement earlier this year
that it had completed the first stage of the acquisition of 50% of Cerverceria
Nacional Dominicana for $1.2 billion. (Please see our comment "Fitch: Anheuser
Busch InBev's Deleveraging Continues Despite Investment in Dominican
Republic," published in April 2012 and available at www.fitchratings.com)

When we upgraded ABI's rating to 'A' in May 2012, we also took into account
M&A risk for ABI and mentioned that the chances of ABI eventually gaining full
control of Grupo Modelo or buying back its South Korean business should not be
excluded. However, we also noted that adverse credit consequences arising from
such events would be limited in terms of integration risk and leverage
increase.

Still, under such terms ABI's headroom for further M&A activity in 2012-2014
would be constrained. The company's path to deleveraging and its ability to
retain its current 'A' rating would be a function of the extent to that ABI
and its subsidiary AmBev decide to withhold any increases in dividend payments
or resumption of share buyback activities, as well as the scope for limiting
major increases in capex.

We note that we do not have information to indicate that this transaction
would happen. Should ABI announce a Modelo transaction, our analysis would
focus on what particular ABI entity undertakes the acquisition (ABI directly
or through the cash rich subsidiary AmBev, or through Anheuser Busch InBev
Worldwide, the sub-holding that conducted the acquisition of Anheuser Busch).
We would also examine integration plans and what actions ABI would undertake
in order to maintain a steady path to deleveraging.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include hyperlinks to
companies and current ratings, can be accessed at www.fitchratings.com. All
opinions expressed are those of Fitch Ratings.

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Contact:

Fitch Ratings
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