BUD and STZ's 'Special Relationship'
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Well, it looks like the only option I didn't outline in my June 28th article is the one that AB InBev is going with. As part of their $20.1 billion acquisition of Grupo Modelo, AB InBev (NYSE: BUD) has helped negotiate the sale of Modelo's share in Crown Imports, the US importer of pretty much every popular Mexican beer (Corona, Modelo, Pacifico, Victoria). The sale to Constellation Brands (NYSE: STZ), valued at $1.85 billion, is meant to help US regulators better swallow the AB InBev/Grupo Modelo merger, which was on rocky ground due to antitrust issues. AB InBev will still own Modelo's operations and they will "ensure the continuity of supply, quality of products and ability to introduce innovations," but Constellation will have the power to "independently import, market, and distribute" all of Modelo's brands in the US.
So, will this satisfy US regulators? AB InBev and Grupo Modelo are being proactive by setting up a favorable deal at the outset, rather than risk being publicly shut down by the US. Sure, they have an army of high-priced attorneys, consultants, investment bankers, and advisors telling them what decisions to make, so it's safe to assume the deal will go through. Odds are also on the deal side, given that 15 of the past 16 antitrust cases brought before the Supreme Court have been won by defendants.
If there is a hiccup in the transaction, though, I see regulators finding fault with the "special relationship" AB InBev will share with Constellation, given that the acquisition of Crown will double Constellation's annual revenue. This massive dependency could not sit well with regulators; even though Constellation will technically control pricing, AB InBev will control supply. When InBev bought Anheuser Busch in 2008, the deal was blessed by regulators when InBev agreed to sell its Labatt USA subsidiary. They didn't just sell marketing rights, they sold everything: production, promotion, marketing, and selling. Labatt only made up 0.7% of US market share, but it was what got the deal through.
Adding further complexity to the deal, AB InBev actually has the option to buy back the Modelo brands from Constellation every 10 years at 13 times earnings (before interest and taxes), connecting the two companies even further. The clear winner thus far is Constellation, with the stock jumping 49% since deal rumors were announced last week. It is doubtful that the regulatory environment will change so dramatically in 10 years that the US would allow this option to be exercised, but AB InBev is still protected. Should the full acquisition not be approved, AB InBev could then exercise. Perhaps this provision is telling and something to be pondered? Is this protection for a deal AB InBev is not entirely sure will be approved? One can only wonder...
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