Talks Between the DOJ and Anheuser-Busch InBev "Progressing Smoothly"

It isn’t our habit to respond to Bloomberg articles, but we received some questions so we thought it might make sense to respond more broadly.  Just prior to the close, Bloomberg reported that talks between the Department of Justice and Anheuser-Busch InBev regarding the proposed transaction involving Grupo Modelo were “progressing smoothly”.  The article further suggested that the DOJ’s focus was on Constellation Brands’ plans to expand Piedras Negras (brewery in Northern Mexico).

The article went on to suggest that it was unlikely an agreement would be reached prior to March 19^th (the date both parties agreed the pending litigation should be stayed until).

Three quick points:

1. It appears to us that the DOJ wants to make certain that ABI will be removed from the business of brewing the beer that comes into the US.  This is unsurprising as the DOJ, in the original complaint, equated controlling the supply with de facto market share control.  Absurd? Yup, but the current deal structure should satisfy the DOJ on this count.
2. It would also seem that the DOJ is comfortable with STZ being involved in the transaction (another frequent question) – in fact, it is unlikely that ABI would have reworked the deal in the fashion it did without at least a wink from the Justice Department that it could live with STZ as the owner of the Corona brand.
3. The March 19^th date isn’t a drop dead date – both parties agreed to the date, and both parties can agree to extend the date.  We are fairly certain any Judge would be happy to keep the negotiations going, particularly if progress is being made.  Most courts have better things to do.

So, to the extent that the facts contained in Friday’s article are correct, they are wholly consistent with our view of a high probability of the new deal structure gaining regulatory approval.  Having said that, we prefer the risk/reward profile on BUD (versus STZ), and think BUD can work toward $110 per share.  STZ has upside toward $50 per share, in our view, but more significant downside risk in the event the DOJ elects to revert to some of its prior irrationality.

Call with questions,

Rob

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E: 

P: 

Matt Hedrick

Senior Analyst