AB InBev revises Modelo beer deal to clear U.S. objections
BRUSSELS (Reuters) - Anheuser-Busch InBev (ABI.BR), the world's largest brewer, has revised the terms of its $20.1 billion takeover of Mexico's Grupo Modelo (GMODELOC.MX) in hopes of ending U.S. Department of Justice concerns that the deal would mean higher prices for U.S. beer drinkers.
Shares of the three companies involved in the deal closed higher.
The U.S. antitrust agency filed a lawsuit last month to block the deal between the makers of Budweiser and Corona on grounds that it removed an independent competitor and opened the door to higher prices.
The Justice Department had argued that AB InBev's plan to sell its 50 percent share of U.S. beer importer Crown Imports to the world's largest wine company Constellation Brands (STZ.N) was inadequate since AB InBev would still have supplied Crown with Corona and other Modelo beers and had the option every 10 years to buy the whole of Crown.
AB InBev said on Thursday it had now agreed to sell Modelo's Piedras Negras brewery in Mexico, near the U.S. border, to Constellation and grant it perpetual rights for Corona and other Modelo brands in the United States, at a cost of $2.9 billion.
The U.S. beer market is currently dominated by AB InBev and MillerCoors, a joint venture between SABMiller (SAB.L) and Molson Coors Brewing Co (TAP.N) with a 30 percent share.
The Justice Department had said that when the big two brewers raised prices, the smaller Modelo often did not follow and captured market share as a result.
Bernstein Research said in a note that it felt that the new deal, involving the complete divestment of the U.S. business of Modelo, should remove the Justice Department's concerns.
Department spokeswoman Gina Talamona said she could not comment on specific proposals. "However, we would give any proposal serious consideration and at the same time we would continue to prepare for litigation," she said.
The amended terms resolved the conflict with the Justice Department but kept what was most important about the original deal - non-U.S. sales, said AB InBev CEO Carlos Brito.
"Our deal is not about the United States. It's really about Mexico and the rest of the world. That hasn't changed," he told Reuters. He declined to say when he thought the deal might close.
Analysts have said the main benefits for AB InBev, which already has about 50 percent of the U.S. beer market, lie in Mexico, the world's fourth largest market in terms of profit generated, and in driving Corona sales abroad.
Chief Executive Officer Rob Sands said the new deal was a "transformational step" for Constellation, which has wineries but no breweries. Constellation would still acquire the 50 percent of Crown it did not own for $1.85 billion.
While Thursday's actions could resolve the question over raw market share, the Justice Department had also expressed concern that Constellation opposed Crown's attempts to compete aggressively on price - a key antitrust issue.
The complaint quotes an email dated August 2011 from a Constellation executive to a Crown executive, saying: "Since ABI has already announced an October general price increase, I was wondering if you are considering price increases for the Modelo portfolio? ... I think ABI's announcement gives you the opportunity to increase profitability without having to sacrifice significant volume."
Three antitrust experts said Thursday's actions meant it was likely the Justice Department had rejected the deal or the companies felt they needed to release the arrangement to comply with disclosure rules.
The changes strengthening Constellation could make it harder for the Justice Department to win in court if they pursue planned litigation, they said.
"They (Constellation) are going to be independent. They have their own brewery, they have their own brand. They're not just the distributor," said Michael Sohn, an antitrust expert at Davis Polk and Wardell LLP.
New York-based Constellation Brands Inc (STZ.N), the world's largest branded wine company, makes Robert Mondavi and Ravenswood wines and has wineries in the United States, Canada and New Zealand. It also sells spirits like including Black Velvet Canadian Whisky and SVEDKA vodka.
The revised deal would make Constellation the third largest beer producer in the United States.
RAISES SYNERGY TARGET
AB InBev also said it was now targeting $1 billion of synergy benefits from taking full control of Modelo from an initial $600 million.
AB InBev, which got half of Modelo with InBev's 2008 acquisition of Budweiser-maker Anheuser-Busch, said 40 percent to 45 percent of the synergies should be realized from lowering costs, while 55 percent to 60 percent would come from lower selling, general and administrative expenses over the next three to four years.
AB InBev shares closed 5.9 percent higher at 69.59 euros, making them among the strongest performers in the FTSEurofirst 300 index .FTEU3 of leading European stocks and fully recovering the ground lost in the past two weeks.
When the Justice Department announced its challenge on January 31, Constellation shares dropped 17.4 percent, those of AB InBev fell 7.8 percent and Modelo's ended 6.8 percent lower.
Constellation shares jumped as much as 39 percent to $44.18 on Thursday, a lifetime high, and closed at $43.75. Modelo closed up 4.4 percent.
AB InBev and Constellation have agreed to a three-year transition period, during which Constellation plans to invest $400 million to expand Piedras Negras' capacity to enable it to supply 100 percent of U.S. needs, up from 60 percent today.
AB InBev would supply Constellation with beer, cans and IT support over this period. Constellation would have the option to extend the beer supply period by up to two more years.
Constellation said its $4.75 billion purchase price of the Crown stake and the U.S. business of Modelo would push its debt to core profit (EBITDA) ratio to between 5 and 5.5 times.
It said it expected strong free cash flow would bring that down to between 3 and 4 times as soon as possible.
(Addtional reporting by Diane Bartz, editing by Robert-Jan Bartunek, Will Waterman, Ros Krasny, Andrew Hay and Gunna Dickson)
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