Anheuser-Busch InBev forced to revise Modelo deal

March 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The world’s largest brewer, Anheuser-Busch InBev (AB InBev), was forced to revise the terms of its $20.1bn takeover of Mexican brewery Grupo Modelo in February after falling foul of the US Department of Justice’s antitrust agency.

AB InBev had initially agreed to acquire the remaining stock that it did not already own in Modelo in June 2012, before the Department of Justice filed a lawsuit to block the deal on 31 January.

The acquisition was vetoed amid fears that the takeover of Modelo would remove an independent competitor from the marketplace, thus creating a duopoly. Additionally, the purchase of Modelo would not only consolidate AB InBev’s place as the market leader in the US beer industry but would also lead to higher prices for consumers. Currently AB InBev and Modelo control 46 percent of the $80bn a year US beer market between them. William Baer, head of the Justice Department’s antitrust unit, said beer “is the sort of product that matters to consumers, if you have a very slight price increase that happens because of this deal, it could mean that consumers will pay billions of dollars more”.

The US beer industry is already dominated by AB InBev and MillerCoors, a joint venture between SABMiller and Molson Coors Brewing Co, who enjoy a 30 percent share themselves. The US Justice Department argued that when the big two brewers raised prices, the smaller Modelo often did not follow suit and captured market share as a result.

Under the terms of the original deal, AB InBev intended to sell its 50 percent stake in joint venture Crown Imports, a US beer importer and distributor, to the company’s business partner and Crown co-owner Constellation Brands. However this action was deemed inadequate by antitrust regulators as AB InBev would still have supplied Crown with Corona and additional brands, as well as retaining the option to purchase Crown entirely every 10 years.

In response to the Justice Department’s blockage, AB InBev has now announced that it will sell the rights to Corona beer and other Modelo brands in the US to Constellation for $2.9bn. Additionally, the revised deal will see AB InBev sell Modelo’s Piedras Negras brewery on the Mexican-US border to Constellation. The revised deal would see Constellation become the third-largest beer supplier in the US with a 5 percent market share.

AB InBev and Constellation have also announced that the companies will enter into a three-year transition period, during which Constellation will invest $400m to increase capacity at the Piedras Negras brewery. Following the investment, the plant will be able to supply 100 percent of US demand, an increase from the current level of 60 percent. AB InBev will supply Constellation with beer, cans, and IT support for the duration of the transitional period. AB InBev noted in a statement “We believe this revised agreement addresses all of the concerns raised by the US Department of Justice in its lawsuit, leaving no doubt about Constellation’s Crown beer division’s complete independence and ability to compete”.

Although the revised deal had not been accepted at the time of writing, it is expected that the new terms will appease the antitrust regulators, enabling AB InBev to push forward with the acquisition. Once the deal has been agreed, the company intends to focus its attention on sales in the markets it insist the takeover is really about – emerging markets like Mexico. “Our deal is not about the United States. It’s really about Mexico and the rest of the world. That hasn’t changed,” said AB InBev chief executive officer Carlos Brito. Mexico is the world’s fourth largest beer market in terms of profit generated.

In light of the new proposals AB InBev revised its initial estimate of the annual synergies of the deal from $600m to $1bn. According to the company, 40 to 45 percent of those synergies should be realised from lowering costs. The additional 55 to 60 percent would come from reduced selling, administrative and general expenses in the next three to four years. The company also estimates that its annual revenue would reach $47bn, up from $40bn, if the Modelo takeover is approved by regulators.

The decision by the Justice Department to block the deal represented the first real obstacle to a worldwide beer industry which has been consolidating for a number of years. As a result of the consolidation process, the beer industry has been reduced to few major, multinational companies that own most of the big name brands. AB InBev has been one of the most active in the acquisition market, completing over 15 takeovers since 2008.

Shares in AB InBev closed up 5.9 percent at €69.59 following the company’s statement on 14 February. Constellation’s shares leapt 39 percent to a record $44.18 before closing at $43.75. Shares in Modello closed up by 4.4 percent.

Richard Summerfield