In a press release this morning, Anheuser-Busch InBev, Grupo Modelo and Constellation Brands announced a revised merger agreement that completely divests Grupo Modelo’s interest in the U.S. in perpetuity. Under the terms of this revised agreement, STZ will acquire (in addition to the Crown JV as originally contemplated) Compania Cervecera de Coahuila, an asset that includes Grupo Modelo’s brewery in Northern Mexico as well as the profit stream associated with the sale of beer to Crown. The total compensation now moves to approximately $4.75 billion ($2.90 billion for the brewery and $1.85 billion for Crown).
This revised agreement provides for STZ’s complete control over all aspects, including production, of Grupo Modelo’s brands in the United States, effectively establishing STZ as the third largest brewer in the U.S
Almost certainly, this revised agreement was created within the context of the ongoing discussions with the Department of Justice, satisfying most, if not all, of the concerns expressed in the DOJ’s complaint, making regulatory approval extremely likely.
What Does it Mean?
As some background, there are two profit streams associated with the sale of Grupo Modelo’s brands in the United States.
- Crown JV - $2.5 billion of revenue, $430 million of EBIT – to be acquired by STZ under original agreement
- Compania Cervecera de Coahuila - $310 million of EBITDA derived the manufacturing and licensing of the Modelo brands to the Crown JV
STZ will own the entirety of the profit pool associated with the sale of Grupo Modelo’s brands in the United States. The quick and dirty math is as follows (2013):
- Approximately $660 million of EBITDA generated by the wine and spirits business at STZ
- An incremental $450 million of EBIT/EBITDA to be acquired under the terms of the original transaction (likely very little depreciation as there were few assets associated with the deal)
- $310 million of EBITDA associated with Compania Cervecera de Coahuila
- $1,420 million in total EBITDA at Constellation (roughly and conservatively)
- At $40 per STZ share, we conservatively estimate EV/EBITDA at 10.5x – for perspective, TAP trades at 9.4x a 2013 EBITDA number we don’t think that the company will achieve
The Good and the Bad
- Positive – deal almost certainly gets done having satisfied the bulk of the concerns expressed by the DOJ
- Positive – STZ becomes the 3rd largest brewer in the U.S. with a premium portfolio in the fastest growing segment of the U.S. beer market
- Negative – new transaction moves STZ between 5.0 – 5.5x debt to EBITDA
- Negative - deal moves from asset light to asset heavy for STZ – there were virtually no assets associated with the original deal. Under the modified terms, STZ owns a brewery and one that needs to be expanded over time to meet the demands of the Crown JV, to the tune of $400 million in CAPEX over three years
Obviously, today's news justifies our view that the value of the transaction to Anheuser-Busch InBev was so substantial globally that the company was willing to make significant concessions related to the business in the U.S. With the closing of the deal highly likely now that the transaction has been revised, we believe that STZ should move to the mid-$40's based upon our math. We suspect that the first print of the day will be close to $41 and that buyers come into what will be a very different Constellation Brands going forward. We may even get a couple of upgrades from the shops that downgraded the name at $31 last week.
HEDGEYE RISK MANAGEMENT, LLC