Hey, ignore that pager. In fact, throw it in the ocean and grab a Corona. There's bound to be plenty of that beverage going around for the next, oh, 10 years. That's the scope of a distribution deal announced Monday night between Corona brewer Grupo Modelo and its larger U.S. distribution partner, Constellation Brands (NYSE:STZ).
Grupo Modelo is the largest brewer in Mexico, and its Corona and Nueva Modelo brands have proved quite popular north of the Rio Grande, too. Now Modelo has booted one of its two U.S. distributors and is shacking up with the other one for the long term.
The two companies are setting up an equally owned joint venture with a 10-year agreement to stay in the game. Modelo reportedly has the exclusive right to terminate the contract after seven years, or renew for another 10 at its expiration. The venture will also assume distribution for Constellation's St. Pauli Girl and Tsingtao imports, assuming that the respective brewers agree to the deal.
This creates a specialized beer-importing operation that can focus on nothing but building its import and product-distribution networks. I wouldn't be at all surprised to see this new beast approaching other foreign beer brands such as Carlsberg or Heineken with offers to handle their U.S. sales.
However, that's somewhere down the road. The challenge at hand is to improve operations for the brands already in the fold. Beer is a low-margin, high-volume business, and any operational-efficiency improvements stand to drop significant amounts of cash to the bottom line.
The two partners will share profits equally, which is good news for Anheuser-Busch (NYSE:BUD), since that company owns about half of Grupo Modelo. As for Constellation, I have mentioned that the stock looks cheap compared with its peers, but that was based on valuation relative to sales or operational earnings. It's trading in line with Diageo (NYSE:DEO) or Fortune Brands (NYSE:FO) on a P/E basis, and if it stays there while improving the cash flow from its top brand, Corona, good things could happen. Stay tuned.
Further Foolish reading:
- Have a beer and crush the market.
- One Fool has been watching Constellation closely.
- Diageo has been singled out for international greatness.
Anheuser-Busch is an Inside Value selection -- twice over -- and Diageo has been chosen for our Income Investor subscribers. Try out any of our investing newsletter services free for 30 days .
Fool contributor Anders Bylund doesn't really like beer, but has been known to sip a Guinness or two on social occasions. Foolish disclosure is good for you, no matter what you drank last night. Check out Anders' holdings , and you'll see that he holds none of the stocks discussed today.
