AB InBev Muscles Up to Keep Heineken at Bay With Modelo

Anheuser-Busch InBev NV (ABI)’s possible bid for the rest of Grupo Modelo SAB (GMODELOC) heralds an intensified beer face-off in Mexico as an industry once dominated by home-grown brewers stands to lose its last local ties.

AB InBev may spend $20 billion buying the half of Modelo it doesn’t already own, a person with knowledge of the matter said, setting up a head-to-head matchup in Mexico between the world’s biggest brewer and No. 3 Heineken NV (HEIA), which acquired Modelo’s chief domestic rival in a deal valued at $7.7 billion in 2010.

With Corona-brand maker Modelo already leading Heineken in the world’s sixth-largest beer market, AB InBev has a chance to boost profit by finding ways to squeeze out costs, and may be able to grab more sales from Heineken by lowering some prices, said Rafael Shin, an analyst at BTG Pactual in New York.

“Any way you see it, we believe it’s going to mean more aggressive competition for Heineken,” Shin said yesterday in an interview. “If you’re going to pay a 20 to 30 percent premium, which is one of our main assumptions here, we believe you’re going to need to boost margins significantly.”

AB InBev and Mexico City-based Modelo said yesterday that they were holding talks, without confirming the substance of those discussions or the $20 billion figure. Leuven, Belgium- based AB InBev inherited a 50 percent noncontrolling stake in Modelo in the 2008 acquisition of Anheuser-Busch.

Heineken bought the beer business of Fomento Economico Mexicano SAB (FEMSAUBD) in 2010, jumping into the Mexican market and strengthening its challenge to Modelo for U.S. import sales. Together, Modelo and Amsterdam-based Heineken control the top five U.S. imported brands.

Regional Brands

AB InBev with full control of Modelo probably would try to pressure Heineken by bolstering sales efforts in northern Mexico, a stronghold for brands of the former Femsa beer unit, which was based in Monterrey, Pablo Zuanic, an analyst at Liberum Capital, said in an e-mailed response to questions.

Further sales gains also are possible because Modelo has done little so far to differentiate a family of beer brands that includes Modelo Especial, Negro Modelo and Victoria, Zuanic said in the e-mail. In a research note, he wrote: “A more aggressive ABI can take share from Heineken-owned Femsa.”

Modelo’s Mexico market share is about 60 percent, according to Lauren Torres, an HSBC Holdings Plc analyst in New York, and Heineken has most of the rest through its Cuauhtemoc Moctezuma unit, with brands such as Dos Equis and Tecate. Modelo and AB InBev spokeswomen declined to comment yesterday, and a message left at Heineken’s Amsterdam headquarters after regular business hours wasn’t returned.

European Takeover

A Modelo sale to AB InBev would seal a European takeover of an industry with deep Mexico roots. Modelo was founded in 1925, and its chairman and chief executive officer is Carlos Fernandez Gonzalez, whose uncle married the sister of one of the founders. Femsa, the company bought by Heineken, traces its lineage to a brewery founded in 1890 in Monterrey.

Heineken is working to make Sol, one of its Mexican beers, an “international brand” while conducting “relaunches” for its Tecate and Carta Blanca lines, Chief Executive Officer Jean Francois Van Boxmeer said on a Feb. 15 conference call.

AB InBev and Modelo already have been outperforming Heineken in investors’ eyes. Shares of both companies jumped 41 percent in the 12 months ended June 22, before the disclosure of talks between the two. Heineken fell 4.4 percent in the period.

Modelo’s Surge

Modelo surged 19 percent yesterday, the most since its 1994 initial public offering, to 116.87 pesos in Mexico City. AB InBev rose 2 percent to 56.75 euros in Brussels, Heineken fell 0.5 percent to 38.8 euros in Amsterdam. BTG Pactual’s Shin has a buy rating on Modelo, while Zuanic of London-based Liberum Capital recommends buying AB InBev.

Karla Miranda, a Grupo Bursatil Mexicano analyst, said the sale of a controlling interest of Modelo may not alter its standing in a country where it boasts a superior market share and pricing power. Modelo reported a 1.2 percent gain in first- quarter domestic volumes while boosting prices 7.2 percent.

“I wouldn’t expect much change in the Mexican beer market,” Miranda said in a telephone interview from Mexico City. “ABI is a rational competitor. It’s not a competitor that comes in and cuts prices and destroys value.”

American drinkers’ taste for Mexican beers may be the biggest lure for AB InBev in taking full control of Modelo. In the first quarter, 38 percent of Modelo’s revenue came from exports, and Liberum Capital’s Zuanic estimated that 80 percent of the brewer’s export business was with the U.S.

Corona is the top-selling imported brand in the U.S., according to SymphonyIRI Group, a Chicago-based market researcher. Two other Modelo brands, Corona Light and Modelo Especial, also ranked in the top five during the 13-week period ended May 13, as did Heineken’s namesake brand and Dos Equis.

In an April 23 report, Miranda wrote that she saw a potential stock gain for Modelo because of the prospect of a takeover. She had the shares rated as market underperform.

“A deal would give Modelo’s brands more exposure at the global level,” Miranda said yesterday. “With ABI’s network, Modelo would reach a lot more countries.”

To contact the reporter on this story: Brendan Case in Dallas at bcase4@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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