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Palatable cures seen for AB InBev's 'merger headache'

by Renee Cordes In Brussels  |  Published January 17, 2013 at 10:39 AM
Is the beer mug half-empty or half-full?

Even if Anheuser-Busch InBev SA/NV has to make concessions to win U.S. Department of Justice approval for the outstanding 50% of Corona maker Grupo Modelo SAB de CV, analysts don't see much danger of the $20.1 billion deal collapsing.

In the past couple of days, the New York Post and Bloomberg reported that U.S. regulators will demand major remedies from AB InBev, the Leuven, Belgium-based brewer of Budweiser, Stella Artois and Beck's, in exchange for approval of the purchase agreed last summer. The New York Post predicted a "merger headache" for the world's top brewer.

The deal got the green light from regulators in Mexico in November, but faces its toughest test in Washington, where talks reportedly concern a long-term distribution and pricing agreement between the merged entity and Crown Imports LLC, AB InBev's joint venture with Constellation Brands Inc. that distributes and markets Modelo's Corona and other brands in the U.S. A decision may not come for another month.

AB InBev spokeswoman Karen Couck said by e-mail that the company continues to expect closing in the first quarter, as announced in June, but that the brewer is not commenting on the DOJ review.

AB InBev shares were up marginally at €67.01 in Brussels Wednesday, equating to a total market value of about €107.7 billion ($143.25 billion). Modelo shares advanced 1.15 pesos in Mexico City to P113.65, valuing its equity at 367.9 billion pesos ($29.1 billion).

When announcing the planned takeover of Mexico's leading brewer, AB InBev billed it as a "natural step in the long and successful partnership" between the two companies, and projected "at least" $600 million in annual cost synergies, phased in over four years, through combined purchasing and various administrative efficiencies.

In a related transaction, Modelo agreed to sell its 50% stake in Crown Imports to Constellation Brands for $1.85 billion, although AB InBev retained the right to exercise an option to buy back the stake every 10 years at a multiple of 13 times Ebit, subject to regulatory approval.

As speculation swirls about possible remedies, analysts poured cold water on suggestions of any real risks to the tie-up from U.S. regulators.

"I suppose that the authorities will ask for some limited concessions, but that does not mean that the whole deal will be cancelled," said Hans D'Haese, an analyst with Bank Degroof in Brussels with an accumulate rating on AB InBev shares.

He also said the $600 million in projected synergies was most likely a conservative figure.

A likely scenario in the DOJ review, according to analyst Wim Hoste of KBC Securities in Brussels, is that AB InBev gives up its call option on Crown Imports. "Personally I think that part of the proposed transaction could face some scrutiny from the U.S. Department of Justice, which might just say, 'If you sell it, sell it forever,'" he said.

He also dismissed criticism that AB InBev could use Crown to influence Corona's pricing policy in the U.S., saying this would not be a major issue in the Washington review in light of an often-overlooked provision in the merger agreement spelling out a pricing formula based on U.S. consumer inflation.

"This should allay some of the concerns or the potential concerns of the Justice Department," said Hoste, who has a hold rating on AB InBev shares with a €67 price target.

Tags: Anheuser-Busch InBev SA/NV | Constellation Brands Inc. | Corona | Crown Imports LLC | Department of Justice | DOJ | Grupo Modelo SAB de CV

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Renee Cordes

Correspondent: Brussels

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