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An increasing number of thirsty consumers worldwide drive major consolidation in the beer market. And one megabrewer's recent announcement heats up a long-standing battle for market share in the ongoing beer wars. Who will emerge as the winners and losers?
Megabrewer Anheuser-Busch InBev (NYSE: BUD ) announced last week that it intends to buy out the remaining stake in partially owned Mexican brewer Grupo Modelo. The deal would add Modelo's Corona, Modelo, and Pacifico brands to its portfolio that currently includes Budweiser, Beck's, and Stella Artois.
The buyout is priced at a 30% premium to the company's June 22 close price, and the deal is scheduled for completion the first quarter of 2013. While some analysts view this as pricey, AB InBev thirsts for greater market share and bragging rights. The Belgian brewer secured the coveted No. 1 and No. 2 beer brands in the U.S. for years, but ever since it lost the No. 2 position to Coors last year, AB InBev has been craving more.
Grupo Modelo has developed Corona into the leading import beer in 38 countries, including the United States. AB InBev will gain not only Corona, but also Modelo Especial -- considered Mexico's premium beer brand and viewed as the sweet nectar in this deal. Modelo Especial has enjoyed double-digit growth annually for the last 17 years. It's the No. 3 U.S. imported beer behind Corona and Heineken. Thirty-five million cases of Grupo Modelo were sold last year, and the goal is to grow the brand to 100 million cases.
Meanwhile, Grupo Modelo will gain AB InBev's global distribution prowess. AB InBev has posted double-digit profit growth the last 10 consecutive quarters. The company will probably enjoy higher margins and greater economies of scale. AB InBev will also gain best practices from Grupo, whose breweries' water usage is regarded as best in class.
Stay thirsty, my friends
The global beer market increased 2.7% in 2011 -- primarily because of growth in emerging markets – and represented an improvement over the 1.6% growth in 2010 and 0.4% in 2009. The four largest global brewers -- AB InBev, followed by SABMiller, Heineken, and Carlsberg -- command a combined global market share of roughly 50%. And they are actively vying for more.
Cutthroat big brewers aren't even attempting poker faces in their race to growing markets. They're all raking in market share through acquisitions. In April, AB InBev agreed to buy the Dominican Republic's Cervecceria Nacional Dominicana, which was promptly seen and raised that very same month by Molson Coors' (NYSE: TAP ) announcement to buy StarBev, an Eastern European brewer. Last year, SAB Miller ponied up for Australia's Fosters, and Heineken bought Fomento Economico Mexicano SAB.
The Mexican beer market represents the world's fourth most profitable beer market. A virtual duopoly exists between Grupo Modelo, founded in 1925, and Heineken's FEMSA Cerveza with its Dos Equis and Tecate brands. The companies enjoy 56% and 41%, respectively, of the Mexican beer market.
Thanks to antitrust laws, Constellation Brands (NYSE: STZ ) will enjoy some spillover effects. AB InBev can't buy Constellation or even Crown -- AB InBev's joint venture with Constellation -- outright. Doing so would create a market-share position signaling red flags in the U.S. antitrust world. Instead, AB InBev will sell its stake in Crown to New York-based Constellation, which will solely distribute Grupo Modelo products in the United States.
This deal comes at an opportune time for Constellation. An anticipated drying up of domestic grape supply has U.S. wineries scrambling to plant new vines and increase capacity. And since it takes at least five years for new grapevine plantings to show up in our favorite pinots, Constellation will benefit from further product diversification, as it is primarily a wine company with a smaller spirits and beer portfolio.
Winners and losers
Last Friday, Constellation's share price soared a meteoric 24% on news of the deal. Shares of AB InBev, Molson Coors, Boston Beer (NYSE: SAM ) , and Central European Distribution (Nasdaq: CEDC ) were all also up intraday.
Of course, the other winner is AB InBev. Not only does the deal include a call provision allowing AB InBev to buy all of Crown every decade at a fixed multiple, but the company also has a rich and tenured track record of successful integration and cost savings of which it expects $600 million annually from the deal. And this one makes strategic sense for the megabrewer.
SAB Miller and Heineken may prove the true losers. This deal squashes any speculation of an SAB Miller buyout by AB InBev because of antitrust restrictions. And Heineken will face much steeper competition in the Mexican beer market with AB InBev introducing its many brands south of the border.
Foolish bottom line
I think this deal will prove a boon for AB InBev and Constellation and a bust for SAB Miller and Heineken. If I were to put my money on just one of these companies, it'd be AB InBev. It has a great track record of successful integration, enormous scale, and vast geographic reach.
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