Mexico's growing beer market, big cost savings and control of Corona beer exports have attracted Anheuser-Busch InBev towards a $15-billion (U.S.) buyout of Grupo Modelo, sources said Monday.
The deal would give AB InBev - the world's largest brewer - access to two to three per cent annual growth in the Mexican market, make at least $250-million of synergies and win distribution rights to Corona, the largest U.S. imported beer brand.
The brewer of Budweiser and Stella Artois already owns a 50.4-per-cent stake in Modelo and is currently in talks to buy the rest from the Modelo controlling families, who have 56 per cent of the shareholder voting power, the sources added.
Mexico is the world's sixth-largest beer market, the fourth most profitable and is a virtual duopoly between Modelo and Heineken. Analysts say it would be a good strategic deal for AB InBev.
"We believe a take-out price would be closer to $15-billion, equating to a 30-per-cent control premium in line with historic average brewing premiums," said analysts at Citi.
Analyst Pablo Zuanic at brokers Liberum Capital says Modelo shares currently trade on 10.7 times core profit, or EBITDA. Mr. Zuanic said he would expect a deal at 13 to 15 times with the mid-point, giving a value for the half stake in Modelo at $14.8-billion.
Modelo has a 50-percent-plus market share of the Mexican beer market, but a relatively low profit margin of around 26 per cent which AB InBev would look to push towards the margin of 60 to 65 per cent it earns in Brazil.
AB InBev declined to comment on a possible deal. Modelo spokeswoman Jennifer Shelley said the company does not comment on rumour or speculation.
Banking sources said the two sides were in close talks, but the sticking point was the size of the premium the Modelo families can extract from AB InBev.
"The families are willing to sell but they want a big price as they see a big boost for AB InBev from owning 100 per cent of Modelo," said one banker close to the talks.
The move would increase AB InBev's focus on North and Latin America, which already accounts for over 90 per cent of profits with its half share of the U.S. market and 70 per cent of Brazil.
AB InBev inherited its stake in Modelo when InBev bought Anheuser-Busch in 2008 for $52-billion. After sharply cutting debt and reported free cash flow of $9.1-billion in 2011, the group has scope to finance a possible deal in cash.
It would be the latest in a series of changes in the global brewing industry as companies seek growth in emerging markets and look to make big savings in procurement and distribution.
In April, AB InBev agreed to buy Dominican Republic's Cerveceria Nacional Dominicana for more than $1.2-billion, while in the same month Molson Coors bought European brewer StarBev for €2.65-billion ($3.5-billion U.S.), and last year SABMiller purchased Foster's for $11.8-billion.
A deal between Mexico City-based Modelo and AB InBev could finally end what has been a rocky relationship since 2008, when Modelo launched an arbitration case claiming it was not consulted about InBev's acquisition of Anheuser-Busch.
The way was cleared for AB InBev to increase its Modelo stake when the Mexican brewer lost the case in 2010, but Modelo Chief Executive Carlos Fernandez said controlling shareholders would not sell their stake.
Analysts said AB InBev taking on the import rights for Corona beer in the U.S. could cause anti-trust problems in the U.S. because of its high market share, but said it could get around this by selling off some of its smaller beer brands.
Corona is currently imported into the U.S. through a joint venture with Constellation Brands in an agreement which runs until 2016. If AB InBev wanted to break this deal early, it would have to pay Constellation compensation.
"The logic is that they take control . Then they get to push through the cost savings plans that they've carried out in the rest of the world," said analyst Gerard Rijk at brokers ING.