The US Department of Justice (DoJ) announced yesterday during trading it is seeking to block AB InBev’s proposed acquisition of the remaining 49.7% minorities in Grupo Modelo that it did not yet own. AB InBev has issued a press release yesterday during trading to announce it views the US DoJ’s action as inconsistent with ‘the law, the facts and the reality of the market place’. AB InBev now plans to vigorously defend its interests in a federal court case against the Department of Justice.
It is now high unclear how long such a court case can take or what the chances are of ABI winning it. The company’s Investor Relations did not want to offer any insights in the previous discussions with the DoJ, on any remedies that have already been proposed etc. AB InBev does not offer any view on timing of an outcome of the court case except that a Modelo deal is now (unsurprisingly) no longer expected to be closed in 1Q13.
We previously considered that the price clauses included in the contract with Constellation on a Crown takeover and which would mean prices charged to Crown/Constellation would be fixed on a formula largely based on CPI (inflation) meaning no additional pricing power of AB InBev towards Constellation, were an important argument why regulators should not simply add up the market shares of the AB InBev (around 47%) and Modelo (around 6%) brands in order to judge the transaction.
Anway, worst case scenario now is that the deal will be blocked and cancelled. We remind that we already integrated the full Grupo Modelo acquisition in our earnings model a few months ago, and that we calculated the EPS accretion from the Modelo acquisition at +2% for 2013 and +6% for 2014 (due to increasing synergies effects), with almost 10% EPS accretion effect upon full inclusion of the $ 600m targeted synergies.
We believe the uncertainty on this transaction is likely to last at least a number of additional months, and the uncertainty for sure is not good for sentiment. If the deal would be blocked ABI’s net debt/EBITDA would fall to around 1.7x by year-end 2013,which would open the door to a significant increase in dividend (gross dividend was € 1.20 per share in 2011 and ABI could in our opinion easily afford to bring the dividend to € 2.0-2.5 per share which would roughly represent a 3-4% yield on the current share price).
The looming uncertainty on the court case will in our opinion continue to weigh on the shares for a while. Future P/E ratios are little changed if we would exclude Modelo from our model after yesterday’s share price drop. We continue to like ABI for its strong market positions in very profitable beer markets such as the US and Brazil, but believe these strengths are already reflected in the current valuation (P/E13e 17.1x and EV/EBITDA13e 12.3x). Hence we see no reason to change our Hold rating.