Cash In on Alcohol Deals In 2010

If 2009 was the year of digesting big deals for the alcoholic beverage industries, then 2010 may be the year when the brewers, distillers and vintners get the mergers-and-acquisitions munchies again.

Investors might think that multinational giants would have been satiated with Belgium's InBev acquiring St. Louis's Anheuser-Busch in November 2008 to form Anheuser-Busch InBev (NYSE: BUD  ) .

Or SABMiller creating a U.S. joint venture in mid-2008 with Molson Coors, which consolidates the administration of the Miller and Coors brands.

Or Denmark's Carlsberg and Holland's Heineken teaming up in April 2008 for a complex takeover of Scottish & Newcastle, as each acquirer took a piece of their Edinburgh, Scotland-based prey.

However, there's a good chance the alcoholic beverages companies will regain their thirst for mergers and acquisitions. And if they overindulge, they can always sell some assets.

The deal-making environment
The M&A mixology looks like this: Pour in the still-troublesome experiences of consumers spending less, trading down to cheaper brands and reducing their patronage at bars and restaurants. Add a dash of sluggish growth in large, mature markets like the U.S. and Western Europe plus the desire to expand or establish a presence in fast-growing markets. Top off with a splash of uncertainty about an economic recovery. Garnish with low interest rates. Presto! You have the ingredients for more deal-making.

Much of the action will take place outside the U.S. Even though some giants, like Diageo (NYSE: DEO  ) and AmBev, are traded as American depositary shares in the U.S., trying to time an M&A investment strategy is further complicated by fluctuating exchange rates, complex corporate governance and, maybe, national pride.

But if the money is right, price can overcome pride. Miller (Milwaukee), Anheuser-Busch (St. Louis), Labatt (Canada) and Scottish & Newcastle (Scotland) are now in foreign hands.

Companies to watch
At the top of the list is Mexico's Fomento Economico Mexicano (NYSE: FMX  ) , and that's no surprise. The company, also known as FEMSA, has said it is discussing its beer business with unnamed suitors, which assorted unidentified sources speculate are SABMiller, Heineken and perhaps Japan's Kirin.

The trick with FEMSA, the second-largest brewer is Mexico, is that beer accounts for only part of its operations. It has a chain of convenience stores and a majority stake in Coca-Cola FEMSA, the largest Coca-Cola bottler in Latin America. Coca-Cola (NYSE: KO  ) owns about one-third of Coca-Cola FEMSA.

Speculation has helped the shares of FEMSA and Coca-Cola FEMSA more than double since early March.

Also high on the deal speculation list is Grupo Modelo, which is traded in Mexico. The buzz is due to a dispute with Anheuser-Busch InBev, which owns 50.2% of Mexico's largest brewer but lacks operational control. The dispute, now in arbitration, is related to the takeover of the old Anheuser-Busch. Analysts aren't sure if Grupo Modelo just wants money, might seek independence or might agree to a takeover by Anheuser-Busch InBev.

Deals on several continents
Resolution may have an impact on Grupo Modelo's relationship with Constellations Brands (NYSE: STZ  ) , which is the world's largest wine producer but which also has a joint venture with Mexican company to sell Grupo Modelo's Corona beer in the U.S. Constellation is another company to watch in 2010 due to potential deal activity.

Grupo Modelo recently sued Constellation, alleging that the U.S. company hadn't adequately supported the marketing efforts of the Crown Imports joint venture. Constellation said the claims "lack merit."

A more immediate concern for Constellation is the "vine tuning" of its portfolio. In November, the company said it was considering selling some assets and/or combining some U.K. and Australian wine businesses into a joint venture with an Australian wine company.

Constellation sold several wine and spirits businesses in 2008 and 2009, while Anheuser-Busch InBev has turned asset-shedding into an art form. Among its big deals, it sold its theme parks to Blackstone Group (NYSE: BX  ) , a South Korea brewery to Kohlberg Kravis Roberts, a stake in a Chinese brewery to a Japanese beer company and central European beer businesses to a Luxembourg-based private equity firm.

Beer-making rather than deal-making
Investors looking for a company that's out of the M&A limelight can turn to Boston Beer (NYSE: SAM  ) , best known for the Samuel Adams premium brands. Boston Beer's stock has more than doubled since early March.

Boston Beer recently raised its fiscal-year earnings forecast to a range of $2.05 to $2.35, up from a range of $1.75 to $2.05. Improved operating efficiencies plus "favorable" energy and commodity costs prompted the good news. This was the second earnings revision since early November.

Although it's dwarfed by international brewers and its market share is small, you never know if some deal-hungry multinational brewer or private equity firm might stalk Boston Beer. However, I wouldn't count on any deal soon.

Boston Beer has a complex ownership structure, including two sets of stock. The setup allows C. James Koch, the founder and chairman, to elect five of eight board members. Koch controls nearly one-third of the voting power, and he's probably too busy brewing to worry about international wheeling and dealing.

Fool contributor Robert Steyer doesn't own shares of any companies cited in this story. Coca-Cola is a Motley Fool Inside Value recommendation. Diageo and Coca-Cola are Income Investor recommendations. FEMSA and SABMiller are Global Gains selections. The Fool has a disclosure policy.


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