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American hangover for AB InBev

Regulatory concerns could damage Modelo deal
AB InBev is not having a great January. Any joy the brewer might have felt after raising $4bn of debt at rates as low as 0.8 per cent this week will have been tempered by regulatory woes on both sides of the Atlantic. In the UK, it was told that it has to share the Budweiser name with rival Budvar. More seriously, in the US it is haggling with regulators over its $20bn acquisition of Modelo, whose brands include Corona.
The big issue is market share – the combined company would have a 55 per cent share of the US beer market by volume. AB InBev’s attempt to soothe regulatory concerns by handing control of Crown Imports (which distributes Modelo’s drinks in the US) to Constellation Brands – limiting the combined market share to 49 per cent – might not be enough. It may also have to give up its option to buy Crown, which can be exercised every 10 years. And if that is not enough, it might have to tweak its supply agreement with Crown or even allow another brewer to produce some of Modelo’s drinks.
Problems with US regulators need not be fatal to the deal, whose benefits rely largely on cost savings in Mexico and wider distribution of Corona. But exports are 40 per cent of Modelo’s sales, and about
two-thirds of exports go to the US, so it is a sizeable chunk of business. Bernstein estimates that being forced to lose some of Modelo’s production could strip $75m out of the deal’s cost savings of $600m. That said, AB InBev has overdelivered on savings promises in the past, so $600m might still be achievable.
Worries about the deal are weighing on the shares. Since it was announced last June, AB InBev has underperformed rivals SABMiller, Heineken and Carlsberg. The company hopes that the deal can be completed in the first quarter of 2013. If the uncertainty drags on, the risk is that the shares will lose more of their fizz.

18 Jan. 2013

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