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ABI Says It Will Sell Modelo’s U.S. Business To Constellation In Attempt To Get Deal Done

February 14, 2013

Following the U.S. Department of Justice’s move to block Anheuser-Busch InBev’s proposed $20 billion acquisition of the 50% of Grupo Modelo it doesn’t already own, Anheuser-Busch Inbev (ABI) has agreed to divest itself of Modelo’s U.S. business. Under the revised terms of the blockbuster deal, ABI will sell perpetual rights to the Modelo portfolio and the Piedras Negras brewery where Modelo brands are produced for the U.S. market to Constellation Brands for $2.9 billion. As originally agreed upon, Constellation will pay $1.85 billion to ABI to acquire the 50% of Crown Imports, Modelo’s U.S. marketer, that it doesn’t already own.

If the revised deal is approved, Crown will become the U.S. market’s third-leading brewer, behind ABI and MillerCoors. While Crown’s U.S. market share of roughly 6% would be far below ABI’s 49% or MillerCoors’s 29%, it would have a larger piece of the value share because of the Modelo portfolio’s relatively high pricing, and also more promising growth trends than either of its top two competitors.

According to a joint statement from ABI and Constellation, the $2.9 billion price tag is based on an assumed 2012 EBITDA of $310 million earned from manufacturing and licensing the Modelo brands for sale by Crown, with an implied multiple of approximately 9 times. The brewery in Piedras Negras—located just south of the Texas border—currently fulfills around 60% of Crown’s current demand. However, ABI and Constellation have agreed to a three-year transition services pact, during which time Constellation plans to invest some $400 million to expand the facility so that it’s able to supply 100% of Crown’s needs for the U.S. market.

In late January, the Department of Justice (DOJ) filed suit to block ABI’s proposed purchase of the entirety of Modelo, Mexico’s leading brewer, on the grounds that it was anticompetitive. In its suit, the DOJ claimed that ABI and Crown have for the past few years essentially taken the opposite approach on pricing, with ABI consistently raising prices and Crown aiming to narrow the gap between brands like Budweiser and its Corona franchise. With ABI assuming full ownership of Modelo, though, the DOJ argued that the brewing giant could reverse Crown’s pricing strategy, with the end result being that American consumers would be paying more for the brews that collectively account for 55% of the U.S. beer market. The DOJ also took issue with the original deal’s provision that ABI could buy out Crown after 10 years, allowing ABI to sell the Modelo brands in the U.S. market.

For ABI, Modelo’s 60% share of Mexico’s fast-rising beer market is the main prize of the pending acquisition, allowing it to make concessions on the U.S. portion. 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 category contracted by 2.4%.


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