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AB InBev revises Modelo deal to clear U.S. objections

View of Anheuser-Busch InBev logo outside the brewery headquarters in Leuven June 25, 2012. REUTERS/Francois Lenoir
View of Anheuser-Busch InBev logo outside the brewery headquarters in Leuven June 25, 2012. REUTERS/Francois Lenoir

By Philip Blenkinsop

BRUSSELS (Reuters) - Anheuser-Busch InBev , the world's largest brewer, has revised the terms of its $20.1 billion takeover of Mexican brewer Grupo Modelo to overcome U.S. government objections that it would have restricted competition.

The U.S. Department of Justice (DOJ) filed a lawsuit to block the deal on the grounds that it removed an independent competitor and could have led to higher U.S. beer prices.

The DOJ was not convinced that AB InBev's related plan to sell its 50 percent share of U.S. beer importer Crown Imports to the world's largest wine company Constellation Brands would have remedied that defect, since AB InBev would still have supplied Crown with Corona and other Modelo beers and had the option every 10 years to buy the whole of Crown.

AB InBev said on Thursday it had now agreed to sell Modelo's Piedras Negras brewery next to the U.S. border to Constellation and grant it perpetual rights for Corona and other Modelo brands in the United States, at a cost of $2.9 billion.

The U.S. beer market is currently dominated by AB InBev and MillerCoors, a joint venture between SABMiller and Molson Coors Brewing Co with a 30 percent share.

The DOJ had said that when the big two raised prices, the smaller Modelo often did not follow and took market share.

Bernstein Research said in a morning note it felt that the new deal, involving the complete divestment of the U.S. business of Modelo, should remove the DOJ's concerns.

A source with knowledge of the DOJ's thinking said the new proposal would be evaluated to determine if it resolved the central problem that the deal would push up U.S. beer prices.

DOJ spokeswoman Gina Talamona said she could not comment on specific proposals.

"However, we would give any proposal serious consideration and at the same time we would continue to prepare for litigation," she said.

AB InBev said the amended terms would resolve such issues.

"We believe the new agreement keeps intact the strategic rationale of our transaction with Grupo Modelo while addressing all the concerns raised by the U.S. Department of Justice in its lawsuit," AB InBev CEO Carlos Brito told a conference call.

"There can be no doubt of Constellation's ability and incentive to remain an independent competitor in the U.S. market."

Analysts have said the main benefits for AB InBev, which already has about 50 percent of the U.S. beer market, lie in Mexico, the world's fourth largest market in terms of profit generated, and in driving Corona sales abroad.

Constellation would still acquire the 50 percent of Crown it did not own for $1.85 billion.

RAISES SYNERGY TARGET

AB InBev also said it was now targeting $1 billion of synergy benefits from taking full control of Modelo from an initial $600 million.

AB InBev, which got half of Modelo with InBev's 2008 acquisition of Budweiser-maker Anheuser-Busch, said 40 to 45 percent of the synergies should be realized from lowering input costs, while 55 to 60 percent would come from lower selling, general and administrative expenses over the next three to four years.

AB InBev shares were up 6.2 percent at 69.73 euros at 11 a.m. ET, making them among the strongest performers in the FTSEurofirst 300 index <.FTEU3> of leading European stocks and almost recovering the ground lost in the past two weeks.

When the DOJ announced its challenge on January 31, Constellation shares dropped 17.4 percent, those of AB InBev fell 7.8 percent and Modelo's ended 6.8 percent lower.

On Thursday, Constellation shares were up 36 percent, and Modelo's were up 4.3 percent.

Constellation said the revised deal would make it a fully independent competitor and the third largest producer and marketer in the U.S. beer industry.

AB InBev and Constellation have agreed to a three-year transition period, during which Constellation plans to invest $400 million to expand Piedras Negras's capacity to enable it to supply 100 percent of U.S. needs, up from 60 percent today.

AB InBev would supply Constellation with beer, cans and IT support over this period. Constellation would have the option to extend the beer supply period by up to two more years.

Constellation said its $4.75 billion purchase price of the Crown stake and the U.S. business of Modelo would push its debt to core profit (EBITDA) ratio to between 5 and 5.5 times.

It said it expected strong free cash flow would bring that down to between 3 and 4 times as soon as possible.

(Additional reporting by Diane Bartz, editing by Robert-Jan Bartunek and Will Waterman)

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