I'll drink to that

It is still early but I think we might have already seen the deal of the year. No it’s not the ABI and Groupo Modelo takeover but a side deal between the two giants and Constellation brands (STZ) a wine company. The side deal involves STZ gaining ownership in the US of Corona. According to BrandZ below Corona is the 4th most valuable beer brand in the world. To appease concerns over market share concentration ABI has agreed to sell the US rights of the Corona brand to STZ. STZ will have the brand rights to Corona Extra, the best selling imported beer, Corona Light, the leading importing beer and Modelo Especial the third largest and one of the fastest growing major imported brands.
 

 

Concentrated beer

The US beer industry according to the DOJ complaint is highly concentrated with just two firms accounting for 65% of sales nationwide. With this deal STZ will become the 3rd largest beer company exposed to the fast growing Hispanic market in the US.

Source: DOJ, http://www.justice.gov/atr/cases/f292100/292100.pdf
 
A better balanced deal?

A Corona in both hands! The initial deal was not convincing and was blocked by regulators, this deal should ease their concerns. The initial deal involved STZ only having the right to import into the US for a 10 year period with ABI having an option to buy them out. STZ would not own the rights to the brand or production and would have been highly dependent on ABI. The DOJ believed that ABI's initial transaction to offload the remaining 50% of the Corona US import business was structured to "create a facade of competition" between ABI and STZ the importer.

The deal announced last night addressed all these concerns, now STZ will own the brands in the US and production facilities. STZ will become a stronger competitor over the longer term with perpetual ownership and ability to manufacture not just Coronas. STZ will be able to focus more on building volume and scale rather than just profit as a short term importer.

How do you know someone is planning for the future?

They buy two cases of Corona instead of one! The Piedras Negras brewery is key to the future of the deal. The brewery was completed in 2010 and utilizes state of the art technology which allows the brewery to be self-sufficient and able to be expanded in a modular fashion. The brewery is only 15km from the US border. According to STZ the brewery has capacity of around 120 million cases of beer which will cover 60% of STZ US import needs until they ramp up the plant further with ability to expand to approximately 360 million cases.

The beauty of the deal is that STZ has no restrictions on what beer they could produce at the facility, they can start producing their own craft beer. Importantly the deal helps to eliminate the uncertainty involved with the terminal value of the business with the ten year buyback eliminated. Out of nowhere STZ is now the 3rd largest beer company in the US with one of the world's newest production facilites. Will have to drink a few Coronas before I could imagine another deal that would beat this one.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive is long STZ

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