• Modelo seeks to recover funds
  • Constellation will defend its position
  • Analysts question future of JV deal

Constellation Brands has vowed to defend itself against a lawsuit filed by Mexican brewer Grupo Modelo over the amount of funding both firms have given to their Crown Imports joint venture.

Constellation said today (16 December) that it is aware of the lawsuit, but that Modelo has not "formally served" it with the legal action.

Modelo said last night that it has filed a suit in New York, seeking to recover marketing funds from Constellation that it alleges should have been put into the the two firms' 50-50 Crown Imports venture. Crown sells Modelo's Corona beer in the US.

Constellation said Modelo's complaint "lacks merit" and vowed to "defend its position".

Its response came as news of the lawsuit caused analysts to question the future viability of the Crown Imports venture and the potential impact of legal action on Constellation earnings.

Modelo claimed that it has paid a "disproportionate" amount of Crown Imports marketing expenses.

Constellation confirmed that incremental promotion and marketing spend for Crown in the 2010 calendar year is the main subject of the lawsuit.

"Previously, the incremental spending in question was provided by Grupo Modelo and [this] was agreed upon once again for the 2010 business plan," it said.

Modelo and Constellation set up Crown Imports, which also sells Tsingtao and Pacifico beers in the US, in January 2007. Crown's board comprises four directors from each company and the joint venture contract runs until the end of 2016.

Modelo said that it remains "fully committed" to the venture, but analyst group Stifel Nicolaus today questioned future relations between the two firms.

"Suing one's business partner is generally a bad precedent for ongoing business relations," it said.

Stifel downgraded its rating on Constellation shares from buy to hold on this basis, but said the move "is not an expectation of material damages/compensation on Constellation's part".       

Constellation, which receives around 41% of its earnings before interest and tax via equity income from Crown, said: "The funding at issue is not material to Constellation's overall financial position."

It added that "Crown remains fully engaged in executing against the plan for calendar year 2010 and growing its business through the entire initial term of the contract".

Modelo recently reported a 4% fall in third quarter export volume sales, which include Crown. Export value sales grew by 8% on the year before, largely due to the depreciation of the Mexican peso currency against US$.

Separately, Modelo is also seeking arbitration proceedings against Anheuser-Busch InBev.

A-B had a 50% non-controlling stake in Modelo and the Mexican brewer has argued that this should not automatically pass to the new InBev-run conglomerate.

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