Late Friday, Constellation Brands provided an update regarding its joint (along with Anheuser-Busch InBev) negotiations with the Department of Justice. STZ announced that the parties had reached an agreement in principle that was “substantially in line” with the revised transaction and that the parties had approached the Court to request one final stay of the proceedings until April 23rd in order to finalize the documents associated with the DOJ’s consent decree.
This all but ends the drama associated with Anheuser Busch InBev’s acquisition of Grupo Modelo and the associated Crown transaction, after much hand wringing (some of it my own) and at least three downgrades of Constellation Brands (at $30/share). We won’t belabor our view of the companies involved, it’s been consistent from the start – we see STZ fairly valued at $50/share, but recognize that mid-cap managers may chase this name subsequent to the DOJ’s final approval. We prefer BUD toward $110 per share and suspect that the name could see money flows with the deal in the rear view mirror.
What we would prefer to comment on now, with tax day right around the corner, is what the Department of Justice has done for you, the U.S. taxpayer, during this process. From the DOJ’s website:
“The goal of the antitrust laws is to protect economic freedom and opportunity by promoting free and fair competition in the marketplace. Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality, in an open market and on a level playing field, unhampered by anticompetitive restraints. Competition also tests and hardens American companies at home, the better to succeed abroad.”
Sounds reasonable, right? Or…
When the DOJ filed its lawsuit to block this deal, we took issue with more than a few statements made in the brief and saw them as counterfactual to the current state of affairs in the U.S. beer industry. At the heart of our disagreement with the DOJ’s position was this notion that the 6.5% market share owned by Grupo Modelo in the U.S. somehow represented a significant counterweight to the pricing intentions of the other 93.5% of the market. Or that the decisions made by Grupo Modelo on pricing were a permanent state of affairs. We could keep going, but you get the point. In an effort to combat an unlikely decrease in competition, here is what the DOJ has accomplished:
- Forced a U.S. company (STZ) to substantially increase its debt burden by all but compelling ABI’s sale of production assets in Mexico to STZ
- Increased capital investment ($400 million over three years by STZ) and employment in Mexico
Here’s what would have happened had the DOJ done nothing, in our estimation – a better run Modelo increases sales in the U.S. through a more focused Crown, retailers and consumers are happier on the margin and the government collects a few extra bucks in terms of duties on increased beer imports.
Unfortunately, under our scenario, the DOJ doesn't get to puff its chest and say that it fought for Joe Six Pack (literally).
Happy Tax Day!
Enjoy the weekend,
HEDGEYE RISK MANAGEMENT, LLC