AB InBev revises Modelo deal to meet U.S. objections

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Published February 14, 2013

| Reuters

Anheuser-Busch InBev , the world's largest brewer, has revised the terms of its $20.1 billion takeover of Mexican brewer Grupo Modelo to overcome U.S. government objections that it would have restricted competition.

The U.S. Department of Justice (DOJ) filed a lawsuit to block the deal on the grounds that it removed an independent competitor and could have led to higher U.S. beer prices.

The DOJ was not convinced that AB InBev's related plan to sell its 50 percent share of U.S. beer importer Crown Imports to the world's largest wine company Constellation Brands would have remedied that defect, since AB InBev would still have supplied Crown with Corona and other Modelo beers and had the option every 10 years to buy the whole of Crown.

AB InBev said on Thursday it had now agreed to sell Modelo's Piedras Negras brewery next to the U.S. border to Constellation and grant it perpetual rights for Corona and other Modelo brands in the United States, at a cost of $2.9 billion.

The U.S. beer market is currently dominated by AB InBev and MillerCoors, a joint venture between SABMiller and Molson Coors Brewing Co with a 30 percent share.

The DOJ had said that when the big two raised prices, the smaller Modelo often did not follow and took market share.

Bernstein Research said in a morning note it felt that the new deal, involving the complete divestment of the U.S. business of Modelo, should remove the DOJ's concerns.

Analysts have said the main benefits for AB InBev, which already has about a 50 percent share of the U.S. beer market, lie in Mexico and in driving Corona sales abroad.

"The AB InBev and Grupo Modelo transaction has always been about Mexico and making Corona more global in all markets other than the U.S., where the brands will be owned and managed by Constellation," AB InBev CEO Carlos Brito said in a statement.

Constellation would still acquire the 50 percent of Crown it did not own for $1.85 billion.

RAISES SYNERGY TARGET

AB InBev also said it was now targeting $1 billion of synergy benefits from taking full control of Modelo from an initial $600 million.

AB InBev, which got half of Modelo with InBev's 2008 acquisition of Budweiser-maker Anheuser-Busch, declined to give further details, beyond saying this was based on a more thorough analysis after work on planning the integration of the brewer.

"The only puzzle is how they get the synergies out," said Andrew Holland, beverage analyst at Societe Generale. "That is a huge number while getting rid of the biggest and most efficient brewery."

AB InBev shares were up 5 percent at 69 euros at 0850 GMT, making them among the strongest performers in the FTSEurofirst 300 index <.FTEU3> of leading European stocks and almost recovering the ground lost in the past two weeks.

When the DOJ announced its challenge on January 31, Constellation shares dropped 17.4 percent, those of AB InBev fell 7.8 percent and Modelo ended 6.8 percent lower.

Constellation said the revised deal would make it a fully independent competitor and the third largest producer and marketer in the U.S. beer industry.

AB InBev and Constellation have agreed to a three-year transition period, during which Constellation plans to invest $400 million to expand Piedras Negras's capacity to enable it to supply 100 percent of U.S. needs, up from 60 percent today.

Constellation said its $4.75 billion purchase price of the Crown stake and the U.S. business of Modelo would push its debt to core profit (EBITDA) ratio to between 5 and 5.5 times.

It said it expected strong free cash flow would bring that down to between 3 and 4 times as soon as possible.

(Reporting By Philip Blenkinsop, editing by Robert-Jan Bartunek and Will Waterman)

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