Drinkers of Corona beer sometimes like to wedge a slice of lime into the tops of their bottles. Shareholders in Grupo Modelo, which owns the brand, have absolutely no need for such gimmicks.
They have just agreed a deal under which AB InBev is to buy the 50 per cent of Modelo that it does not already own for $19bn, a tasty 30 per cent more than the Mexican company’s undisturbed share price.
At first sight, the price looks frothy. AB InBev is paying a $4bn market capitalisation premium for half of Modelo and promises to generate annual cost savings of $600m within four years. Taxed and capitalised, those synergies are worth $4.2bn, only slightly more than the premium it is paying.
But the company has impressive form here. When InBev bought Anheuser-Busch in 2008, it promised $1.5bn of savings per year, but says it is now delivering $2.3bn. Overdelivery on a similar scale this time round would create annual savings of closer to $900m, worth $6.3bn today. There are a lot of ifs in there but the company’s record suggests that investors should give it the benefit of the doubt.
The deal could have been even sweeter for AB InBev if it had been able to control the marketing and distribution of Corona in the US. But that distribution is controlled by Crown, a joint venture between Modelo and Constellation Brands. AB InBev has agreed to sell Modelo’s share to Constellation for $1.9bn. The move is possibly designed to mollify the competition authorities, but it will deny AB InBev the chance to push Corona through its US distribution platform and reap huge benefits in the process.
No matter. This was an acquisition waiting to happen. AB InBev is promising to beat the deal’s cost of capital within three years. Both sets of shareholders should give it a warm salud.
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