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Distribution a key concern in Grupo Modelo review

by William McConnell in Washington | Published July 2, 2012 at 2:06 PM

Anheuser-Busch InBev SA/NV's plan to acquire the remaining stake it does not already own in Mexico's Grupo Modelo SAB de CV will require extensive antitrust review. Officials from the companies predicted it will take until the first quarter of 2013 to win the necessary approvals in the U.S., Mexico and other countries.

In a conference call with analysts, AB InBev CEO Carlos Brito said some divestitures might be required beyond one announced Friday, June 29. "It's common on transactions of this size that modifications are required in several jurisdictions," he said.

The deal, which would solidify AB InBev's position as the world's largest brewer, gives AB InBev control over Modelo's flagship Corona brand, the top seller in Mexico. After the deal, AB InBev, the Leuven, Belgium-based brewer of Budweiser, Stella Artois and Beck's, will be the largest beer producer in the U.S., Mexico, Canada and Brazil -- all of which are likely to give the deal significant regulatory scrutiny. China and Belgium will probably examine the deal too.

Aside from the U.S. and Mexico, Brito would not identify the countries where regulatory approval will be required. "We'll have to look at each jurisdiction and make a judgment on where to file," he said.

In Brazil, AB InBev would produce the domestic Skol, Brahma and Antarctica brands, which control almost 20% of the market. In Belgium the company would control that country's Stella Artois and Jupiler brands. And in China it would have the Harbin and Sedrin brands. Brazil and China are expected to be the top two markets for growth in beer consumption over the next decade.

AB InBev and its predecessor Anheuser-Busch Cos. began acquiring an interest in Grupo Modelo in 1993 and currently holds 50.3% of the Mexican company.

A major area of focus in the U.S. is likely to be distribution to retailers. Although its overall share of beer distribution is small, AB InBev is nevertheless the country's largest overall distributor.

The companies went a long way toward addressing distribution concerns by announcing AB InBev would sell its 50% stake in Crown Imports LLC to its partner in the Crown venture, Constellation Brands Inc. Crown is the distributor of all Modelo brands in the U.S.

The $1.85 billion transaction gives Constellation control of distribution, marketing and pricing for the Modelo brands here, which also include Corona Extra, Corona Light, Modelo Especial, Pacifico, Victoria and Negra Modelo.

The agreement with Constellation gives AB In Bev the right to exercise a call option for 100% of Crown every 10 years, subject to regulatory approval.

A source with ties to beer distributors said the Crown agreement will make the deal more palatable to rival distributors, although it was unclear Friday whether the deal was sufficient to ensure their trade groups would not oppose it.

The source noted that having a U.S. distribution network largely independent of major brewers has allowed for the enormous growth of new breweries since the mid-1980s. In that time, he said, the number of U.S. brewers has grown from 53 to more than 2,000 today. "It's a great American success story," he said.

The Crown divestiture makes the Grupo Modelo deal, rumored for weeks, "better than many had feared," he said. "This shows AB InBev is at least recognizing the sensitivity of the antitrust issues."

Nevertheless, he said independent distributors are worried about AB InBev's aggressive pace of distributor acquisitions since 2009.

"Many smaller suppliers are concerned about [AB InBev's] expansion and vertical integration."

According to trade publication Beer Business Daily, AB InBev ships 7% of its U.S. volume through its own distribution companies. Brito has said that share could go as high as 50%.

Because of the Crown divestiture, Brito said "this transaction brings no change to the U.S. market" in terms of hurting competition and "we believe this transaction should be approved."

In their Friday presentation to analysts, the companies said the deal would allow them to realize cost-related synergies of at least $600 million over the next four years through combined purchasing opportunities, sharing of best practices for water consumption and other operations, and better efficiency in overhead and system platform costs. They said the deal would also provide one-time cash flow synergies of $500 million over the next two years, primarily through more efficient use of working capital.

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