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Anheuser-Busch InBev (BUD) Attempts to Acquire the Rest of Modelo

By: , dated June 26th, 2012

Anheuser-Busch InBev (BUD: Charts, News), the world’s largest brewer, is reportedly in talks to acquire the remaining 50% of Mexican beer giant Modelo, the maker of Corona. Belgium-based Anheuser-Busch, best known for its Budweiser and Stella Artois brands, currently owns 50% of Modelo, which has a market capitalization of $23 billion. A deal to take over the remaining half would cost Anheuser-Busch well over $10 billion. In addition to Corona, Modelo also produces Negra Modelo, Victoria and Pacifico. Strong exports boosted Modelo’s annual revenue to 91.2 billion pesos ($6.58 billion), causing shares to rally 10.7% in the first half of this year.

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Anheuser-Busch InBev’s portfolio includes approximately 200 brands of beer, as well as soft drink distribution operations. The company’s operations span across seven global segments: North America, Latin America (North), Latin America (South), Western Europe, Central & Eastern Europe, Asia-Pacific and Global Export & Holding Companies. The company is strongly focused on growth in the Americas. Last year, it controlled approximately 50% and 70% of the beer market in the United States and Brazil, respectively.

Over the past year, the brewing industry has narrowed down to several large players, as the largest companies scramble to consolidate global brands. In April, Anheuser-Busch’s Brazilian segment acquired a controlling stake in Dominican Republic-based brewer Cerveceria Nacional Dominicana for over $1.2 billion – a move that created the largest consolidated brewer in the Caribbean. In that same month, Anheuser-Busch’s competitor, Molson Coors Brewing (TAP: Charts, News), took over East European brewer StarBev for 2.65 billion euros, or $3.5 billion, in a bid to expand into untapped markets. Last month, another main competitor, SABMiller, acquired Mexico’s second-largest brewer, FEMSA Cerveza, in a bid to expand into Latin America.

Although Anheuser-Busch controls roughly 50% of Mexico City-based Modelo, it only holds 43.9% of voting shares. The remainder are held by Modelo’s founding members and other closely knit Mexican families in a trust. Since the 2008 merger of Anheuser-Busch and InBev, which gave Anheuser-Busch control in Latin America, Modelo has been defiant of the conglomerate, stating that it was never “consulted” by InBev regarding the merger. In 2008, Modelo launched an arbitration case against Anheuser-Busch, which it lost in 2010. After the loss, Anheuser-Busch attempted to increase its stake in Modelo, but Modelo CEO and board president Carlos Fernandez said that the remaining shares were not for sale.

With most of Modelo’s remaining shares locked in a trust, Anheuser-Busch will find it hard to take over Modelo without taking the hostile route. Even then, the trust stipulates that any vote among members must be unanimous. Last year, a split vote among controlling shareholders killed Modelo’s joint bid for Australian brewer Foster’s with Molson Coors. Any attempt to sway controlling shareholders may result in a hefty acquisition premium far above the $10 billion initially reported by the Wall Street Journal, which may dilute forward earnings for Anheuser-Busch shareholders.

Shares of Anheuser-Busch InBev trade at approximately 14 times forward earnings with a 5-year PEG ratio of 1.25. Meanwhile, its much smaller rival Molson Coors trades at 10 times forward earnings with a 5-year PEG ratio of 5. This suggests that AB InBev is more expensive on a fundamental basis due to expectations of higher growth. AB InBev pays an annual dividend of $1.56 – a 2% yield at current prices, while Molson Coors pays a quarterly dividend of 32 cents – a 3.3% yield. However, given its massive international operations in both alcoholic and non-alcoholic beverages, investors should compare AB InBev with Coca-Cola (KO: Charts, News) and Pepsico (PEP: Charts, News) rather than other brewers.

Other News About BUD
Anheuser Busch InBev SA And Stella Artois Beers In Talks To Buy Rest Of Grupo Modelo
Will AB InBev finally take over the rest of the maker of Corona?
InBev in talks to buy rest of Modelo-source
InBev is about to become even bigger.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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