The ongoing soap opera that is Grupo Modelo

The ongoing soap opera that is Grupo Modelo

The likelihood of Mexico's Grupo Modelo selling up in the future has oft been discussed of late. With Anheuser-Busch InBev accounting for a 50% non-controlling stake in the brewer of Corona, many in the industry find it hard to believe the brewing giant is altogether comfortable in not holding Modelo as a whole. Yet, as Ivan Castano finds out, there are many other runes to be considered when looking into Modelo's future.

According to many industry observers and analysts, Modelo is unlikely to sell its business in the near future, despite continued rumours that Anheuser-Busch InBev (ABI) could bid for the remaining 50% it doesn't already own in Mexico's largest brewer. "It will happen at some point but not this year," says Miguel Mayorga, analyst at GBM brokerage in Mexico City. "Modelo's family shareholders are not interested in selling and there is no offer on the table."

Jeremy Cunnington, senior alcoholic drinks analyst at Euromonitor, agrees. "Modelo is in no rush to sell and they don't have to," he says. "They have a very fast-growing and profitable business as Mexicans continue to trade up to premium beers."

These comments follow recent market speculation in Mexico that ABI will make the offer this year, in order to more directly compete with FEMSA Cerveza, Heineken's recent acquisition and second-placed Mexican brewer. Heineken acquired FEMSA Cerveza, which owns the Dos Equis, Tecate and Sol beer brands, earlier this year for around US$5.5bn.

Evolution Securities analyst Andrew Holland said recently that ABI could buy the 50% stake for $10.8bn this year, assuming the transaction takes place at the same 11.6 times EBITDA premium Heineken forked out for FEMSA Cerveza. "We think it's possible that a deal could be closed this year," Holland said in a research report. "We think an acquisition of Modelo would be a catalyst for a better-than-expected performance."

High price

Modelo currently holds a 56% share of Mexico's beer market – the world's six-largest - with Heineken-FEMSA Cerveza accounting for around 42%. Modelo also leads the export market with 88% of sales, well ahead of FEMSA Cerveza's 12%.

Because of this and other "higher efficiency ratios," Modelo is worth considerably more than Heineken-FEMSA. Therefore, its board members - made up of wealthy Mexican families – appear unlikely to sell for less than 12x its 2010 forecast EV/EBITDA of MXN25.6bn, according to at least two analysts. Based on that metric, Modelo is worth MXN307bn or $23.7bn and the 50% stake $11.85bn.

According to Mayorga, Modelo is currently trading at 10.6x its forecast 2010 EV/EBITDA - significantly above the 9-9.5 industry average. And, according to other analysts, Modelo is working even harder to boost its market value. "They are taking advantage of the Heineken-FEMSA integration 'distraction' to gain even more market share," Mayorga notes.

A second analyst at a fellow Mexican brokerage, who requested anonymity, agrees. "Modelo is waiting for market conditions to improve before negotiating any sale and in the meantime, launching new products in Mexico and the US to boost its lead," the analyst points out. Modelo has also been investing heavily to promote its products in the US, Europe and Asia, she adds.

Corona is the best-selling imported beer in the US and Modelo has been striving to retain that position by launching new product variants as well as introducing bigger, 18-can packs rather than the 12 it has traditionally sold. The company has also introduced its Victoria brand in Europe and is building a bigger presence in China.

Modelo has a "better product mix and higher margins" than FEMSA Cerveza, says the analyst. Backing Mayorga, she agrees that Modelo's top shareholders will fight for a high premium. "This is a very traditionalist family and it has taken them very long to build this business," she says. "It's a great business and they've always valued themselves richly."

Modelo's latest financials revealed second-quarter net profits more than doubled to MXN2.9bn. Sales, meanwhile, rose by 3.6% to MXN23.2bn. The company said domestic turnover increased by 4.9% as it was able to raise prices by 5.1%. Export sales, however, fell by 1.5% as US consumers shunned premium brands in an uncertain economic environment.

Analysts say US sales will likely improve in the short-term as the economy strengthens and the company's marketing efforts begin to bear fruit.

Legal wrangles

These US export efforts, however, may depend in part on the legal dispute Modelo has with US rival Constellation Brands - with which it owns 50% of US beer importer Crown Imports - over claims Constellation is not meeting the venture's marketing funding commitments.

Meanwhile, ABI-Modelo relations must also improve after Modelo lost a bitter legal fight against Anheuser-Busch in July. The company sought $2.5bn for not properly being consulted about InBev's intention to acquire Anheuser-Busch in 2008 - which gave the resulting enterprise the 50% Modelo stake and reportedly "violated certain investment agreements" between Anheuser and Modelo.

"They are probably talking but relations are not very good right now," Mayorga says.

Besides this, for a deal to happen soon, "there would have to be a big generational management change or a very good offer", Mayorga notes. A management reshuffle could happen in the medium term as some of Modelo's family owners are nearing retirement age, he adds.

Of course, Modelo has other options on the table. For example, it could take itself private through an ABI Leverage buyout (LBO), Alan Alanis, a JP Morgan analyst, says in a July research report. The transaction would cost less than it would cost ABI to take control of Modelo and more lucrative for Modelo's controlling shareholders as the change of control premium would not have to be paid to C Class (retail) shareholders, Alanis argues.

This option would also allow Modelo to resolve any future ABI disputes away from the market spotlight.

Echoing others, Cunnington says ABI is also likely to wait until it reduces its "high debt" before it attempts to buy the rest of Modelo. By doing this, ABI obtain better financing rates.

Cutting debt

"ABI doesn't have the cash and has a lot of debt which I think they will want to reduce before making a bid," he says.

Indeed, an ABI spokeswoman confirms that the company is working on lowering its liabilities. "One of our priorities remains to de-leverage the company and we are progressing towards achieving our long-term target of reducing net debt / EBITDA to 2.0 [from 3.3 now]", she says.

Regarding a possible Modelo transaction, she adds: "We look forward to continuing our successful business relationship with Grupo Modelo, but we will not speculate or comment on any questions regarding a future transaction."

Modelo, meanwhile, would not return phone calls or emails seeking comment.

Cunnington says Modelo does not need ABI to grow in the US market. If the current dispute with joint venture partner Constellation Brands is resolved amicably, Modelo could buy the 50% remaining stake in the venture, Crown Imports, to boost its US foothold.

Besides ABI, other takeover candidates are unlikely to pursue Modelo as ABI would certainly be reluctant to give up its 50% holding, creating a big stumbling block to a rival bid, Cunnington says.

US antitrust concerns about ABI getting too big in the country, should it acquire Modelo, and the Mexican company's recent licensing deal with Carlsberg in Russia and Molson Coors in Japan and the UK - as well as efforts to grow alone in China - could also scotch a deal, obervers say.

Still, Cunnington agrees a tie-up between the two companies is on the cards - "just not right away".