In the Spotlight - What could Anheuser-Busch InBev's move on Modelo mean?

Is the final chapter in the  Anheuser-Busch InBev/Grupo Modelo will-they-or-won't-they saga about to be written?

Reports surfaced yesterday that the two companies are in the final stages of talks over a deal for A-B InBev to take full control of the Mexican brewer. Predictably, as is so often the case when such speculation breaks, both companies have battened down the PR hatches, leaving the media to scratch around for clues.

It was The Wall Street Journal that broke the story, but it reported: "The timing of any deal is uncertain, though ... it's possible that the talks could break down before any deal is reached." 

The paper also questioned whether the authorities would allow the transaction. "One question mark around any such deal is whether regulators would bless it, or if A-B InBev's already considerable market power in the US and elsewhere could raise red flags with antitrust authorities - especially given the existing strength of some of Modelo's brands such as Corona." 

Assuming the deal did go through, the New York Times said it would be the "second-biggest takeover Anheuser-Busch InBev has ever made", trailing only 2008's merger between Anheuser-Busch and InBev. "It would also be a prominent large deal at a time when merger activity has slowed, as concern about the global economy has sapped corporate confidence," the paper added.

Meanwhile, analysts are speculating about the implications of a possible deal. Stifel Nicoluas asks if the buy-out would be good for A-B InBev shareholders. The answer is "yes", as it explains an acquisition would be "right in A-B InBev's strike zone" and "not transformative". It adds: "With A-B InBev already owning 50% of Modelo (market cap US$23 bn), even a high premium on the other 50% implies an outlay of less than $20 bn." It would also be "another occasion in which ABI increases and distributes more cash flow," Stifel Nicolaus said.

However, based on the "regulatory opposition" A-B InBev could face, it suggests the company could respond by selling some brands, such as Natural Light and Busch. 

Analysts Nomura says the deal would be "strategically sensible, but could delay cash returns to shareholders". "It was always a question of when A-B InBev would be able to buy out the remaining shareholders in Modelo, rather than if, in our view," it says.

Nomura adds: "As we estimate that the incremental consideration would be under 10% of A-B InBev’s EV, the impact here is not transformational, although there is scope for synergies (especially from integrating US distribution), provided regulatory clearance is achieved." 

On the regulatory issue, Nomura also notes potential issues. "A-B InBev has c.48% share of US beer; Modelo, mainly through the Corona brand, has c5%," it says. "There is a risk that A-B InBev would have to divest some brands to keep market share under 50%." 

Meanwhile, analysts Bernstein Research noted "the timing of the deal (if there is one) is somewhat earlier than we would have expected". 

As just-drinks has reported previously, A-B InBev and Grupo Modelo have had a rocky relationship since 2008, when InBev's purchase of Anheuser-Busch saw it acquire its 50% stake in the Mexican brewer. 

Business Week also picked up on this background in its coverage of the current situation. "Modelo ... sought to prevent Anheuser-Busch from selling its stake to InBev as part of the 2008 merger that also gave A-B InBev nine of Modelo’s 19 board seats," it says. "At the time of the transaction, Modelo CEO Carlos Fernandez said his company was interested in buying back Anheuser-Busch’s non-controlling stake, which the Budweiser maker bought in the 1990s."

It also highlights Modelo loss of an arbitration bid in July 2010,  to deny board seats to some A-B InBev directors. "Mexican families including the family of Fernandez own a majority of a holding company that controls the brewer," it says. Meanwhile, Modelo has "expanded in the US and in other countries without using A-B InBev’s distribution network," Business Week noted.