Brussels: Anheuser Busch InBev, the world’s biggest brewer, is taking over Mexico’s Grupo Modelo for $20.1 billion, giving it dominance in Latin America’s second-largest economy and adding Corona, the top-selling imported beer in the United States, to its brands.
The long-awaited deal is the biggest foreign buyout of a Mexican company in more than 20 years and shows how much global brewers are willing to pay for developing market growth in an increasingly consolidated industry.
AB InBev, the owner of Budweiser and Stella Artois beers, said on Friday it had reached an agreement with Modelo’s controlling families to buy the half of Modelo it does not already own, increasing its exposure to Mexico’s beer market which is growing at about 3% a year.
Modelo, founded in 1925, is Mexico’s biggest brewer with a 50%-plus market share in a virtual duopoly with Heineken’s FEMSA Cerveza in the world’s fourth most-profitable beer market.
AB InBev expects cost savings from the deal of at least $600 million annually after four years, more than most analysts anticipated, plus a further one-time $500 million of cashflow gains.
The new expanded AB InBev would produce about 400 million hectolitres (10.6 billion US gallons) of beer a year, 75% more than world number two SABMiller, with estimated revenues of $47 billion and $17 billion brands, with the addition of Corona Extra, Modelo Especial and Victoria.
The Belgium-based brewer said it had added $14 billion of new bank loans to fund the all-cash transaction, adding that it would reduce its net debt/core profit (EBITDA) ratio to 2.0 times during 2014.
Some analysts believe AB InBev could then line up SABMiller as its next acquisition target. Others say that the drinks operations of PepsiCo would make more sense.
In a related but separate transaction, Modelo will sell its 50% stake in joint venture Crown Imports to partner Constellation Brands Inc for $1.85 billion. Crown Imports distributes Modelo beers in the United States in a deal that runs to the end of 2016.
If AB InBev had wanted to buy out Constellation and distribute the beer itself, it would have pushed its market share in the United States above 50%, leading to antitrust concerns.
However, the deal includes a call option allowing AB InBev to buy all of Crown every 10 years at a fixed multiple.
Constellation shares soared 24.4% to $27.06, while AB InBev shares were up 3.88%, outperforming in sharply firmer European stock markets and against a 1.8% gain for the STOXX European food and beverage index.
Modelo shares, which shot up on Monday when talks were announced, closed 0.19% higher at 117.96 pesos. AB InBev’s bid is $9.15, equivalent to about 122.43 pesos now.
High Price, Big Savings
Analysts said AB InBev’s bill was high, a 30% premium relative to Friday’s close and at an enterprise value to core profit (EBITDA) multiple of 15.4 times.
That compares with a multiple of 11 for Heineken’s purchase of FEMSA Cerveza and 15 for SABMiller’s acquisition of Foster’s.
“Modelo is the market leader and FEMSA is not, and Modelo has the leading import brand into the United States,” said Societe Generale analyst Andrew Holland, adding that he had expected a multiple of 13 before the deal was announced.
“It was always going to be high, given that Modelo shareholders are under no compulsion to sell. But InBev has a strong track record in integration and cost savings,” he said.
AB InBev chief executive Carlos Brito defended the price paid as “pretty reasonable.”
“A 30% premium is not something unheard of,” he said.
Two Modelo board members have committed to invest $1.5 billion of their proceeds in AB InBev shares, to be delivered within five years. The pair, Valentin Diez and Maria Asuncion Aramburuzabala, will also join AB InBev’s board.
Modelo’s controlling families, including some of Mexico’s wealthiest and descendants of the company’s founder, were in no rush to sell. AB Inbev made the first approach on the deal and talks became serious toward the beginning of this year, two sources familiar with the matter said.
AB InBev and Modelo confirmed they were in talks on 25 June, following a series of deals by big brewers looking to expand in growing beer markets and find ways to cut costs.
In April AB InBev agreed to buy the Dominican Republic’s Cerveceria Nacional Dominicana for more than $1.2 billion, while in the same month Molson Coors bought East European brewer StarBev for €2.65 billion ($3.3 billion). Last year SABMiller purchased Foster’s for $11.8 billion.
AB InBev inherited a 50.4% stake in Modelo when InBev bought Anheuser-Busch for $52 billion in 2008. The enlarged group had hoped to mop up the rest of the Mexican brewer, but Modelo launched arbitration proceedings, claiming it should be consulted over any change in control of the stake.
The arbitration panel ruled in favour of AB InBev in 2010. Since then AB InBev executives have joined the Modelo board and pressure emerged from some family members and other investors to look for a sale.
“The relationship has been there for 20 years. Like any relationship you have good days and bad days,” AB InBev CEO Brito said. “But the net of the good and bad was so positive that at some point we decided to look forward as opposed to looking backwards.”
The deal is set to be completed in the first quarter of 2013 subject to US and Mexican regulatory approval, which AB InBev’s Brito said he was confident of securing.
A poll of three antitrust experts said they expect the deal to be approved by the US Justice Department.
Leuven, Belgium-based AB InBev will apply to list shares on Mexico’s stock exchange, Brito said on a call with reporters.
Lazard was the lead adviser to AB InBev while Morgan Stanley advised Modelo.