A-B InBev and Grupo Modelo Could Create a Brewing Powerhouse

Photo courtesy of Creative Commons.

After nearly a week of negotiating, A-B InBev reached an agreement Friday to purchase Mexican Brewer Grupo Modelo for $20.1 billion, according to a joint press release from the two companies.

A Testy History

The St. Louis Post-Dispatch first published news on Monday that the two breweries were in discussions to merge. At the time, the Post-Dispatch reported A-B InBev would purchase the company for $12 billion. Modelo stock rose almost 2o percent following the announcement on Monday.

The merger represents the culmination of a long, but occasionally strained, relationship between the two brewing companies. According to the Post-Dispatch, the companies have done business since 1993, when what was then Anheuser-Busch bought shares in Modelo to expand its business into Mexico. Eventually, A-B owned half Modelo’s stocks and 9 of its 19 board seats. Modelo Chief Executive Officer Carlos Fernandez was even on the A-B board.

When InBev tried to takeover A-B in 2008 executives in St. Louis tried to buy the rest of Modelo as a way to strengthen the company and stay independent, but the deal fell through and Fernandez quit the A-B board, a series of events described in the Julie MacIntosh book Dethroning the King. After A-B and InBev merged, Modelo took the joined company to court. Modelo sought $2.5 billion in damages because A-B didn’t consult the Mexican brewery before transferring its 50 percent ownership of Modelo to InBev when the two merged. The court ruled in favor of Anheuser-Busch.

The Deal

Under terms of the deal, Grupo Modelo’s “name, identity, heritage and headquarters in Mexico City will be maintained,” according to the official press release. Modelo will have its own board of directors and two Modelo board members will join A-B InBev’s board. As part of the transaction, Modelo will streamline its corporate structure. JP Morgan Analyst Mike Gibbs told the Post-Dispatch A-B InBev’s operating proficiency could raise Modelo’s profit margins from 24 to 35 percent by 2014. Gibbs said InBev improved A-B’s profit margin to 40 percent from 23 percent. A-B InBev is paying $9.15 per share to acquire Modelo, a 30 percent premium over the price the stock closed at in Belgium (where InBev trades) Friday before news of the sale became public.

The New Company

Once the two companies have combined—which is likely to be in 2013—InBev will expand its title of the world’s largest brewer. According to the release, the purchase will bring together five of the top six most valuable beer brands in the world and seven of the top 10—Budweiser, Bud Light, Corona, Skol, Stella Artois, Brahma and Beck’s. The combined company would also bolster Grupo Modelo’s position as the top beer company in the world’s fourth most profitable and growing market, Mexico. The joined company expects to produce 40 billion liters of beer annually and generate revenues of $47 billion. By comparison, SABMiller, the world’s second-largest brewer, produces 22.9 billion liters, or a little more than half as much, and generates revenues of $21.7 billion. Once the purchase is complete, A-B InBev will operate in 24 countries and employ 150,000 people.

“Together we will be the leading global brewer with top brands around the world and positions in some of the fastest growing countries,” Grupo Modelo Chairman and CEO Carlos Fernandez said.

Analysts favor the deal, too.

“This is a deal that makes sense on virtually all fronts,” Tom Pirko, managing director of consulting firm Bevmark, said. “The economies of scale are there, and the brand package is very attractive.”

JP Morgan’s Mike Gibbs estimates the merger will increase A-B InBev’s earnings per share by 7 percent next year.

By getting larger the company can purchase supplies more cheaply and operate more efficiently. According to the release the company expects to generate $600 million from this improved efficiency alone.

Anti-Trust Concerns

However, the deal won’t be final until early next year because the merger is pending regulatory approvals. The merger would give A-B InBev a 54 percent share in the American market. Earlier this week, the Post-Dispatch speculated A-B InBev might be forced to sell one of its brands to avoid violating anti-trust law.

News sources such as Bloomberg have speculated A-B InBev is already trying to satisfy anti-trust concerns. As part of the deal, Grupo Modelo has agreed to sell its 50 percent stake in Crown Ventures, which imports and markets Grupo Modelo products in the U.S., to Constellation Brands at a price of $1.85 billion.

On Friday, after the deal was announced, InBev stock rose nearly 4 percent, from €59.01 to €61.30.


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