Beer Marketer's Insights

Modelo Loses Arbitration Bid for $2.5 Bil from ABI; Status Quo

07-12-2010

Took almost 2 yrs, but as most expected, “an arbitration panel issued a decision finding that the combination of Anheuser Busch and InBev did not violate the investment agreement between entities of AB and Grupo Modelo,” AB InBev announced a few hours ago. So no award, no penalties, no change for now in ABI Modelo relationship. ABI owns non-controlling 50.2% stake of Diblo, which owns brewing biz of Grupo Modelo. ABI “looks forward to continuing its successful business relationship with Grupo Modelo,” ABI said. But will that relationship get closer? Many expect ABI to make a bid for the rest of Modelo, but Bernstein’s Trevor Stirling already has note out opining that “deal looks unlikely in the near term.” Why’s that? “Possible discussions may have foundered,” Trevor wrote because: 1) potential antitrust issues in US if ABI were to gain full control of Modelo (recall Justice made ABI divest Labatt USA, and Modelo biz 7X bigger than what Labatt USA sells here; 2) hard to figure a “fair price” for Modelo given Constellation’s 50% share of Crown and any potential “remedy” Justice might come up with. Then too, not a lotta indication Modelo anxious to sell.

Decision “strengthens AB InBev’s hand,” wrote Redburn’s Chris Pitcher, “effectively ties Modelo to AB InBev” and “it makes logical sense for ABI to take full control of Modelo.” But relationship between ABI and Modelo “may require some remedial work.” Other issues on Modelo’s plate too. Modelo did licensing deal with Carlsberg in Russia, not ABI, Chris notes. Modelo also has ongoing lawsuit with Crown in US, not to mention a “tough” Mexican beer mkt with new competitor Heineken. All in, “ruling buys ABI time to build up balance sheet resources” and create “some further headroom before embarking on another major transaction,” Chris concludes.