After approximately a day of rumours, AB InBev and Grupo Modelo both have confirmed they are in strategic talks. AB InBev issued a press release in the late afternoon yesterday which phrased it as follows: ‘there have been discussions between the company and Grupo Modelo regarding a possible transaction to expand the current relationship. These discussions may or may not lead to a transaction and any speculation on terms and conditions is therefore premature. There is a long history of partnership between Anheuser-Busch InBev and Grupo Model and AB InBev has great admiration for the Modelo business and its brands.’
The most likelyscenario clearly is a takeover by AB InBev of the remaining 49.65% economic interest in Grupo Modelo it does not yet own. Remember that this 49.65% economic interest is split over a 35.31% stake in the floated Grupo Modelo entity and also a 23.25% direct stake in the key operating subsidiary Diblo.
Initial rumours yesterday morning talked about over $ 12bn for acquiring the remaining minorities (we viewed that price as quite low); later rumours pointed at $ 20bn (although this amount might include a rumoured $ 2bn one-off penalty for halting the Crown JV distribution agreement Modelo has with Constellation Brands in the US and which theoretically only expires at year-end 2016). If we use an $ 18-20bn range for the minorities that would value Grupo Modelo at 16.9-18.8x EV/EBITDA12E (based on the Bloomberg Modelo consensus EBITDA12), which is not particularly cheap and certainly at the high-end of historical industry deals. We do believe significant savings potential exists at Grupo Modelo for ABI’s notoriously efficient and disciplined management approach, as evidenced also by the difference in profitability between Grupo Modelo (EBITDA margin of 30.1% in 2011) and ABI’s Brazilian business (Latin America North EBITDA margins of slightly over 50% in 2011), despite a somewhat different market structure (Mexico duopoly with Grupo Modelo clearly market leader vs. Brazil where ABI is the dominant player with almost 70% market share with three challengers each holding around 10%).
Paying $ 18-20bn for the remaining minorities would push up ABI’s net debt/EBITDA multiple by year-end 2012 from an estimated 1.9x (assuming no Modelo deal) to about 2.7-2.8x, which is still very manageable and certainly no hurdle for such a transaction.
We called a Grupo Modelo buy-out a very logical deal in yesterday’s morning note, but did consider the rumoured price ($ 12bn) as relatively low. The newer rumours of a price tag of up to $ 20bn are in our opinion most likely more indicative, but would also make such a deal more challenging from a shareholder return perspective. So while we would still view a deal as a good strategic move, it might come at a fairly high price. After the public confirmation of strategic discussions going on, we still see no reason to change our Hold rating and € 56 price target.