Anheuser-Busch InBev NV (ABI), the world’s biggest brewer, is unwilling to sell Grupo Modelo SAB’s newest state-of-the-art beer bottling plant as a concession to win U.S. approval of its $20.1 billion takeover of the Mexican company, two people familiar with the matter said.
Any insistence by U.S. antitrust regulators for divestiture of the plant, located near Piedras Negras, Mexico, would be a dealbreaker, either triggering litigation or causing AB InBev to walk away from the transaction, said the people, who asked not to be named because the matter isn’t public.
Talks between the companies and the Justice Department, which is reviewing whether the transaction would hurt competition in the domestic beer market, center on how to structure a long-term supply and pricing agreement for importing Modelo’s brands to the U.S., three people familiar with the matter said Jan. 15. The department hasn’t demanded sales of production assets or outsourcing of production to third parties, the people said.
The antitrust division is examining a clause in the merger contract between AB Inbev and Modelo that would allow AB InBev after 10 years to buy back Modelo’s current U.S. importer, Crown Imports LLC. Under the proposed deal, control of Crown would be sold to Constellation (STZ:US) Brands Inc.
Competitors have argued the buy-back option should be removed to ensure the importer remains independent, said another person familiar with the matter.
AB InBev. Modelo
Marianne Amssoms, a spokeswoman for AB InBev, and Jennifer Shelley, a spokeswoman for Modelo, Mexico’s largest beer maker, declined to comment.
AB InBev agreed in June to buy the 50 percent of Modelo it doesn’t own already in a transaction that would marry Budweiser with brands including Corona Extra, Negra Modelo and Pacifico. Constellation plans to buy Modelo’s stake in Crown, the U.S. distribution joint venture of the two companies, for $1.85 billion.
Modelo invested about $600 million in the Piedras Negras plant, which it describes as “the most modern in the world” in its 2010 annual report. Located close to the border with Texas, the facility has a production capacity of 10 million hectoliters a year, according to company statements. Modelo spokeswoman Shelley declined to disclose the company’s current valuation of the plant.
Under terms of the merger contract, AB InBev is required to show “reasonable best efforts” to obtain the required antitrust approvals short of selling assets of more than $3 billion or any other action that would devalue the company by that amount, according to the brewer’s SEC filing. In that event, AB InBev may have to pay Modelo a termination fee equal to $650 million, according to terms of the contract reported in the filing.
Small brewers are concerned that the merger could hurt their access to the market through wholesalers and retailers, said Dan Kopman, chief executive officer of The Saint Louis Brewery, an independent beermaker in St. Louis that produces Schlafly Beer.
“It’s going to be most critical where you have high market share for both Modelo and AB InBev,” such as southern California, south Texas and Chicago, Kopman said. The related proposed purchase of Modelo’s 50 percent stake in Crown Imports by Constellation won’t reduce AB InBev’s influence over its newly acquired brands, Kopman said.
“I don’t see that as a true separation,” Kopman said. “AB InBev is not going to allow Constellation to go off on a rogue mission in how they market Corona.”
The agreement to sell control of Crown would prevent AB InBev from having influence in marketing, distributing and pricing Modelo’s beers in the U.S., Constellation Chief Executive Officer Rob Sands said in an interview June 29. Constellation would become the sole U.S. importer of Modelo’s brands. The deal also gives Crown more flexibility to import other non-Mexican brands, Sands said.
AB InBev has the right to buy back the entire Crown business every 10 years at a multiple of 13 times earnings before interest and tax, according to the merger agreement. The clause is subject to regulatory approval.
Mexico’s antitrust regulator approved the transaction in November. AB InBev, which is based in Leuven, Belgium, controls 18 percent of the global beer market. Its Bud Light brand is the top selling U.S. beer and Modelo’s Corona is the top import.
Grupo Modelo, based in Mexico City, ranked fourth in the North American beer market in 2011 with a 5.5 percent share by volume, according to Bloomberg Industries and Euromonitor International. AB InBev ranked No. 1 with a 48 percent share of the market, far ahead of No. 2 Molson Coors Brewing Co. (TAP:US), which had 16 percent market share during the same period.
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