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ABI-Modelo Deal Could Be Salvaged With Brewery Disposals, Analysts Say

February 5, 2013

Anheuser-Busch InBev (ABI) faces several unpalatable options following the Justice Department’s move to block ABI’s proposed $20 billion acquisition of the 50% of Grupo Modelo it doesn’t already own. Among them are contesting the Justice Department’s claims in court, abandoning the acquisition altogether or attempting to allay regulators’ concerns about U.S. beer market competition by disposing of production assets for beer destined for the U.S. market.

Some analysts believe the last option may be the best. Modelo’s Piedras Negras brewery has been frequently mentioned as a possible divestiture option. However, reports have suggested ABI won’t agree to part with that state-of-the-art facility, which could potentially handle Modelo’s U.S. production needs on its own. A combination of other facilities from among Modelo’s eight Mexican breweries—which combine for annual production capacity of 70 million hectoliters—could be a substitute.

By surrendering production of Modelo beers headed for the U.S., ABI would put another level of separation between it and Modelo’s U.S. importer, Crown Imports. The move could lessen opportunities for pricing coordination between Crown and ABI, which already owns 49% of the U.S. beer market. Currently a joint venture between Modelo and Constellation, Crown would be acquired fully by Constellation for $1.85 billion if ABI’s Modelo purchase can be approved.

ABI didn’t respond to a request for comment on potential divestitures. While it may be reluctant to relinquish Piedras Negras, ABI is reportedly considering removing another part of the Modelo deal undesirable to regulators: an option in its pending distribution contract with Crown that would allow ABI to buy Crown after 10 years. It’s seen as unlikely that ABI would abandon the acquisition altogether without a fight, not least because it would owe a $650 million breakup fee to Modelo if the transaction fails to close. But a lengthy legal wrangle would also cost ABI time, money and potential embarrassment, given that the Justice Department’s case is built on internal documents.

Analysts like Bernstein Research’s Trevor Stirling have pointed out that while divesting production facilities for the U.S. market would somewhat reduce synergies ABI could gain from the Modelo deal, it wouldn’t affect ABI’s operations in the Mexican market, which is a bigger focus of the proposed acquisition. Often overlooked among larger emerging markets like Brazil, India and China, Mexico is already the sixth-largest global beer market, and it expanded by 14% to 65.5 million hectoliters from 2005-2011, according to Impact Databank. During the same time period, the U.S. beer sector contracted by 2.4%. Within Mexico’s rising market, Modelo controls around a 60% share.


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