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AB InBev’s Modelo Talks Push Brewers to Endgame: Retail

InBev’s $20 Billion Modelo Bid Pushes Brewers to Endgame
Bottles of Grupo Modelo SAB Corona Light brand beer sit in a box during deliveries in Mexico City, Mexico. AB InBev already controls almost half of the U.S. beer market and may have to sell off assets if the purchase of the Modelo stake is completed in order to meet antitrust requirements. Photographer: Susana Gonzalez/Bloomberg

Anheuser-Busch InBev NV’s push to acquire full ownership of Grupo Modelo SAB is moving the beer industry into the final stages of a decade-long consolidation.

AB InBev, the world’s largest brewer, said yesterday it was in talks with Modelo, the Mexican company of which it owns 50 percent. AB InBev could pay $20 billion for the outstanding stake, according to a person familiar with the matter, who declined to be identified because the discussions are private.

The world’s top five brewers already control almost half of the global beer market, leaving remaining players such as Molson Coors Brewing Co. to scratch out smaller deals in emerging markets or defend themselves against a takeover. The second-largest global beermaker, SABMiller Plc, snapped up Foster’s Group Inc. last year.

“You’re running out of market-leading brewers in emerging markets to buy,” according to Melissa Earlam, an analyst at UBS AG in London.

Amid falling beer consumption in western Europe and a surge in the popularity of so-called craft beers in the U.S., the world’s biggest beermakers have spent most of the past decade expanding into emerging markets and consolidating in developed ones to accelerate sales growth or squeeze out costs.

AB InBev, based in Leuven, Belgium, has led the spree, spending more than $70 billion to snap up dozens of brewers. It was formed in the $52 billion 2008 takeover of Budweiser maker Anheuser Busch Cos. by InBev NV, the biggest of the decade. AB InBev controls 18 percent of the global beer market, while SABMiller has 9.8 percent. It said yesterday it was in talks with Modelo, Mexico’s biggest brewer and the maker of Corona, on a “possible transaction to expand its current relationship.”

More Deals

“SABMiller Plc and AB InBev have led global consolidation, have the flexibility to continue to lead it, and I expect you’ll see more deals in the brewing world,” said Terry Huffine, executive director at DC Advisory, who has worked on acquisitions including SABMiller’s 732 million-pound ($1.14 billion) purchase of Poland’s Kompania Piwowarska.

The world’s five largest beer makers account for 48 percent of global beer sales, according to Euromonitor International. AB InBev already controls almost half of the U.S. beer market and may have to sell off assets if the purchase of the Modelo stake is completed in order to meet antitrust requirements.

“ABI could face regulatory opposition to a transaction as its volume share would go from approximately 48 percent to approximately 56 percent,” Mark Swartzberg, an analyst with Stifel Nicolaus & Co., said in a note. “ABI could respond by selling some brands,” including Natural Light and Busch.

Targeting Asia

Carlsberg A/S, the world’s fourth-biggest brewer with a 5.6 percent market share, has said it’s looking to buy assets in Asia. It will invest $670 million in a brewery in China, the world’s biggest beer market, through 2025, it said June 12.

Heineken, the world’s third-largest brewer with 8.8 percent of the market, also has said it’s interested in emerging-market assets. The brewer bid for Cerveceria Nacional Dominicana, the Dominican Republic’s biggest beermaker, Reuters reported March 27, citing unidentified people with knowledge of the matter. AB InBev ended up agreeing in April to buy CND for $1.24 billion.

While cash-rich brewers seek assets, recent deals haven’t just targeted fast-growing emerging markets with their access to a burgeoning middle class. SABMiller bought Foster’s to expand in the mature market of Australia. Molson Coors agreed to buy StarBev LP for 2.65 billion euros ($3.3 billion) in April, moving into Hungary, Romania and Bulgaria.

Controlling Families

Any assets on the market may not come cheap, though, Earlam said, and controlling families who lack any urgency to do deals could drive up prices, as Kirin Holdings Co. found when it paid $3.6 billion for Schincariol Participacoes e Representacoes, Brazil’s second-biggest beermaker, a deal done in two tranches because of family schisms.

“The question is the willingness of family or minority shareholders to sell,” Huffine at DC Advisory said. “M&A is now more a function of availability than cash flow or desire.”

Modelo, based in Mexico City, also confirmed yesterday it was in talks about a possible transaction with AB InBev, which may or may not lead to a deal.

With Modelo already leading Heineken in Mexico, the world’s sixth-largest beer market, AB InBev also has a shot at boosting 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.

Buying the rest of Modelo also would allow AB InBev to gain full control of Corona, the best-selling imported beer into the U.S., according to analysts at Bank Degroof.

Modelo Soars

A purchase could “jump-start growth in the U.S. with a growing Latino market,” Degroof analyst Marc Leemans wrote in a note yesterday. North America and Latin America North together accounted for more than 80 percent of their earnings before interest, taxes, depreciation and amortization, he wrote. A deal would mean the region is “even more important.”

Modelo fell 4 percent to 112.20 pesos at 2:34 p.m. in Mexico City. AB InBev rose 1.9 percent to 57.83 euros in Brussels at the close.

AB InBev’s purchase of the Modelo stake may be announced as soon as this week, according to the person, who asked not to be identified as the discussions are confidential. The deal isn’t completed and may still fall through, the person said.

Punctured Speculation

If AB InBev takes control of Modelo, the Mexican company would have to pay Constellation Brands about $1.7 billion to gain control of their joint venture to import beer into the U.S., said analysts at Credit Suisse, including Charlie Mills in London. The venture expires at the end of 2016, and it states that Modelo can notify Constellation of its desire to purchase their stake at any point until the end of 2013, a Credit Suisse note said.

A purchase of the Modelo stake by AB InBev may mean any deal to buy SABMiller is at best delayed. SABMiller’s shares fell as much as 2.2 percent yesterday on the news that AB InBev might be in talks with Modelo.

“A deal to buy Modelo would surely puncture short-term speculation” about an SABMiller acquisition, said Trevor Stirling, an analyst at Sanford C. Bernstein in London.

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