UPDATE 1-AB InBev-Modelo could spur other beer deals

Mon Jun 25, 2012 11:42pm BST

Quotes

   

* ABI could buy Constellation's stake in Crown -experts

* ABI may have to pay about $1.7 bln for stake -analyst

* Could sell smaller brands, or Crown stake, to please regulators -analysts

* Constellation shares up 13 pct

(Recasts with comments, bullet points, byline)

By Martinne Geller

June 25 (Reuters) - Anheuser Busch InBev (ABI.BR) has yet to swallow Mexican brewer Grupo Modelo (GMODELOC.MX) but investors are already speculating on what other deals may follow, starting with the U.S. distribution rights for Corona and other beers.

Following news that AB InBev was in talks to buy out Modelo, Constellation Brands Inc (STZ.N) shares jumped as much as 14 percent on Monday -- their biggest spike in nearly a decade -- on expectations that AB InBev would also buy Constellation's stake in Crown Imports. A 50-50 joint venture with Modelo, Crown imports and distributes Modelo beers including Pacifico, Corona and Modelo in the United States.

Some experts said AB InBev would likely want to buy out Constellation's stake, as full control of the business would help its ability to raise beer prices and increase profit margins. Furthermore, it would add only a little to the Modelo deal's price tag, estimated at around $15 billion. [ID:nL6E8HP9G6]

"If ABI ends up spending $15 billion or $16 billion on Grupo Modelo, then paying a pittance to Constellation to get them out of that contract is nothing," said Bump Williams, an industry consultant. "My guess is that ABI's going to buy it out."

Consumer Edge Research analyst Brett Cooper estimated that ABI might have to pay eight times Crown's operating earnings, which translates to $1.7 billion for the 50 percent stake. That compares with Constellation's market value of $3.66 billion, based on the price of its Class A and B shares before Monday's rise.

"Sunday's news could trigger speculation favorable to trading in shares of Constellation," said Stifel Nicolaus analyst Mark Swartzberg. "Speculation of Modelo notifying Constellation that it is buying Constellation's 50 percent stake in their U.S. joint venture."

Modelo and AB InBev, which owns Budweiser and Stella Artois, confirmed on Monday that they were in talks to expand their existing relationship, but said any speculation about a deal was premature. AB InBev now owns half of Modelo. [ID:nL6E8HP9G6]

Constellation and Modelo declined to comment on the Crown Imports venture.

ANTI-TRUST CONCERNS

Buying out Modelo would increase AB InBev's U.S. market share from about 48 percent to about 56 percent, said Stifel's Swartzberg. That could draw interest from antitrust regulators and spur AB Inbev to respond by selling some of its lower-end brands like Natural Light and Busch.

Williams said the relatively small and inexpensive brands could attract foreign buyers eyeing the profitable U.S. beer market, or a company like Pabst Brewing Co, which he called "a collector of brands".

A spokeswoman for Pabst, which owns Pabst Blue Ribbon, Colt 45 and Lone Star, was not immediately available to comment.

Antitrust concerns also work in Constellation's favor, according to DA Davidson analyst Timothy Ramey, as Modelo may end up selling its stake in Crown to Constellation.

"That gives Constellation a huge advantage in this process," Ramey said. He also said he thinks Constellation has done an excellent job growing the Modelo portfolio over the last 15 years.

"It is unlikely Modelo would want to disrupt a good thing," Ramey said.

Constellation's Class A shares were the third-biggest gainers on the New York Stock Exchange on Monday, closing up $2.49, or 12.9 percent, at $21.86.

An increase in call option buying, in the July and August expirations, suggests that some traders were positioning for continued gains in the stock over the next two months, said Interactive Brokers Group options analyst Caitlin Duffy.

(Reporting By Martinne Geller in New York; Additional reporting by Doris Frankel in Chicago; Editing by Tim Dobbyn and Gunna Dickson)

((martinne.geller@thomsonreuters.com)(646 223-6023)(Reuters Messaging: martinne.geller.reuters.com@reuters.net)) Keywords: CONSTELLATION MODELO/

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