Commentary

AB InBev Poised To Get Even Bigger

Several media outlets are confirming a Wall Street Journalreport late yesterday that Anheuser-Busch InBev is bidding to acquire controlling interest in Grupo Modelo SAB, which makes Corona Extra and Modelo Especial beer, among other brands, for a reported $12 billion. AB InBev currently owns a non-controlling stake in Mexico's largest brewer. The deal would end what Dana Cimilluca writes is a “contentious history between the two companies.”

The two brewers indeed have had a relationship for two decades, though it “has at times been testy,” points out the St. Louis Post-Dispatch’s Tim Logan. “Modelo imports AB products to Mexico and over time through the ’90s and early 2000s, AB acquired a 50% equity stake in the company. The St. Louis brewer seriously considered acquiring the other 50% during its bid to stave off acquisition by InBev in 2008 -- the so-called "Mexican defense" -- but ultimately decided against it.” 

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The theory back then was that the debt load from such an acquisition would make AB too expensive for In Bev to handle and cause it to back off. It was, wrote one commentator at the time, “another fine example of executives keeping their jobs at the expense of shareholders.” 

Modelo subsequently filed an arbitration case against AB InBev, claiming that it was not consulted about the acquisition but it lost the case in 2010. Modelo CEO and board president Carlos Fernandez said at the time that controlling shareholders would not sell their stake, report Reuters’ Soyoung Kim, Cyntia Barrera and Elinor Comlay. 

An acquisition is back on the table now that InBev has cut its debt load. Neither of the companies involved would comment on the stories, timing is uncertain but could be as early as this week, and the obligatory “sources cautioned that the deal could still fall apart” has been duly reported, as have some caveats.

“There is a risk that AB InBev (ABI) would have to divest of some brands to keep market share under 50%” in the U.S., Nomura analyst Ian Shackleton writes in a note picked up byBloomberg’s Jeffrey McCracken and Clementine Fletcher. “There could also be restrictions on bringing the U.S. distribution of Corona in-house within ABI.” 

Modelo, which dates back to 1925 and is the largest brewer in Mexico (and the sixth largest worldwide, according to Wikipedia), has a joint venture with Constellation Brands to import and market its bands in the U.S. The company is still controlled by descendants of its founders.

“AB InBev's already considerable market power in the U.S. and elsewhere could raise red flags with antitrust authorities -- especially given the existing strength of some of Modelo's brands such as Corona,” Cimilluca writes. Other Modelo brands also include Pacífico and Victoria. Grupo Modelo also controls the Extra convenience store chain, with 2,100 outlets in Mexico.

Reuters points out that a deal “would be the latest in a trend of consolidation in the global brewing industry,” including AB InBev's Brazilian unit AmBev agreeing to buy a controlling stake in Cerveceria Nacional Dominicana of the Dominican Republic for $1.24 billion, forming the biggest beverage company in the Caribbean.

Molson Coors Brewing is buying East European brewer StarBev for $3.5 billion to give it more exposure in developing markets, as Reuters reported on April 3. In addition, SABMiller last year agreed to buy Australia's Foster's Group for $10.2 billion and Heineken acquired Mexico's second-biggest brewer FEMSA Cerveza. 

The negotiations between AB InBev and Modelo “have been difficult at times,” a source tells the New York Times’ Michael de la Merced. “Among the issues discussed were price and antitrust clearance.”

But analysts quoted this morning seem to think that the differences will be ironed out. 

“This is the deal where the strong one becomes even stronger,” Mikihiko Yamato, deputy head of research for JI Asia in Tokyo, tells Bloomberg’s McCracken and Fletcher. “It’s like musical chairs, and the good deals are taken by strong ones first, and there is not much left for the rest.” 

Then again, as Nancy Trejos reminds us in USA Today, there’s the countervailing trend of craft brews afoot -– so much so that “hotels are getting into the brewing business, either heavily promoting craft beer at social hours or working with local breweries to have their own beers made.”

Craft beer grew by 13% from 2010 to 2011, according to the Brewers Association, and now comprise about 6% of overall sales. Indeed, while the difference in scale between the tiny brewers and the big guys is enormous, the latter are crying a bit in their suds. 

"Every time you lose a light drinker to craft, per caps go down," MillerCoors CEO Tom Long toldBeer Marketer’s Insight last year, "even though there is more interest in beer." Today's Millennial consumer is "very promiscuous," "big on experimentation" and their "palates are changing," he pointed out in concluding that the big brewers are facing “more headwinds than tailwinds.” 

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