Anheuser-Busch InBev AB (ABI)’s $20.1 billion deal for control of Corona beer brewer Grupo Modelo SAB (GMODELOC) hinged on a different beverage maker entirely: wine producer Constellation Brands Inc. (STZ)
The brewers, getting closer to an agreement after years of legal squabbling, asked Constellation less than a month ago whether it would buy out the rest of a distribution venture with Modelo, said people familiar with the discussions who asked not to be identified as talks were private. They reasoned that letting go of the venture would make their transaction more palatable to U.S. regulators, the people said.
That paved the way for Constellation’s $1.85 billion buyout yesterday, giving the world’s largest wine maker sole U.S. distribution of Corona Extra, the top-selling beer import in the country. AB InBev and Mexico City-based Modelo were motivated to be flexible with Constellation and cut a deal quickly to get the larger transaction completed, said two of these people.
The discussions with Constellation began several weeks ago, said Chief Executive Officer Rob Sands. The negotiation centered on one scenario: A buyout of the Crown Imports LLC joint venture by Constellation.
“There was never any discussion or thought to my knowledge about them buying out our side,” Sands said in an interview. “This is clearly a structure that is the most positive from the antitrust perspective.”
Constellation shareholders benefited too. The Victor, New York-based company’s shares jumped 24 percent to a five-year high of $27.06 at the close yesterday, the biggest percentage gain in at least 26 years.
AB InBev, which controls 18 percent of the global beer market, and Modelo actively sought advice on the potential antitrust ramifications ahead of a deal to avoid fallout, according to people with knowledge of the matter. In most transactions with antitrust risk, companies wait until after the deal is announced to explore asset sales or divestitures aimed at appeasing regulators.
The beermakers wanted to avoid antitrust doubt given the size of the transaction, the amount of money being borrowed and the board members who agreed to step down following the announcement, said the people.
AB InBev’s managers have experience judging antitrust concerns. In InBev NV’s $52 billion takeover of Budweiser maker Anheuser Busch Cos. in 2008, the largest brewing deal in history, the new entity had to sell Labatt’s operations in the U.S. to soothe regulators.
Steve Lipin, a spokesman for AB InBev, didn’t respond to a call and an e-mail seeking comment.
AB InBev, based in Leuven, Belgium, and Modelo, Mexico’s largest brewer, have been in sporadic talks for more than a year on a combination, people said. Modelo’s controlling board members became more open to a combination after the Mexican brewer lost an arbitration bid to deny board seats to some AB InBev directors in July 2010, according to the people.
Discussions became more urgent at the beginning of the year, leading to meetings between the main shareholders of both companies in New York and Mexico City.
“A better communication developed between our executive teams and our boards, which we hadn’t been able to do before,” Modelo Chief Executive Officer Carlos Fernandez, a member of one of the families that control Modelo, said yesterday. “The relationship grew.”
Members of Modelo’s management team also viewed a deal more positively after a possible bid for Foster’s Group was rejected by some members of the group of controlling shareholders, according to a person familiar with the matter. Modelo had mulled a bid for the Australian brewer, later taken over by SABMiller Plc (SAB) for about A$10 billion ($10.2 billion), a person with knowledge of the matter said in June last year.
Fernandez yesterday declined to comment on Foster’s, saying the board was “always analyzing different options.”
Modelo Vice Chairman Maria Asuncion Aramburuzabala and Vice President Valentin Diez Morodo, lent their support to the AB InBev combination, people said. These two and others insisted it be an all-cash offer with a high premium, said one of these people.
That became more doable for AB InBev after the brewer of Budweiser paid down debt from the Anheuser deal, said another person familiar with the matter. Although the company was interested in the deal before Modelo was, it would have balked at an all-cash offer until the last few months as financing markets got friendlier for investment-grade borrowers, said this person.
AB InBev will name Aramburuzabala and Diez Morodo to its board after the transaction closes, a person with knowledge of the matter said yesterday. The two new board members have committed to invest $1.5 billion of the proceeds from selling their Modelo shares into AB InBev shares, which will be delivered within five years via a deferred share instrument, according to a statement from AB InBev and Modelo yesterday.
As deal talks progressed, Modelo improved its results, reporting a 1.2 percent gain in first-quarter domestic volumes while boosting prices 7.2 percent.
Export sales, which accounted for 38 percent of the total, rose 3.2 percent in dollar terms. About 80 percent of the company’s exports go to the U.S., according to Jennifer Shelley, a Modelo spokeswoman.
The Crown deal will give wine maker Constellation more control over Corona and confidence to invest more heavily in beer, said CEO Sands. The company had faced losing Modelo’s brands at the end of 2016, when the contract with Modelo expired. Owning all of the Crown venture will diversify sales, boost profit and give Constellation room to take on other import beers, Kaumil Gajrawala, a New York-based analyst for UBS AG, said in a note.
“This deal is a game-changer,” Gajrawala said. It “gives the company a more significant foothold in the U.S. beer market.”
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