AB InBev (NYSE: BUD) Nears Deal to Buy Modelo

Atlanta, GA 6/25/12 (StreetBeat) – Anheuser-Busch InBev NV (NYSE: BUD), the world’s biggest brewer, is close to buying the remainder of Mexico’s Grupo Modelo (OTCBB: GPMCF) SAB for more than $12 billion, according to a person with knowledge of the matter.

The purchase may be announced as soon as this week, said the person, who asked not to be identified as the discussions are confidential. The deal isn’t completed and may still fall through, the person said.

AB InBev, based in Leuven, Belgium, already owns a non- controlling 50 percent stake in Corona maker Modelo, which it gained when InBev NV bought Budweiser brewer Anheuser-Busch Cos. in 2008 for $52 billion in the biggest brewing deal ever. Brewers are among consumer-goods companies looking to expand outside of Europe as high unemployment and sluggish economies holds back growth.

“This is the deal where the strong one becomes even stronger,” said Mikihiko Yamato, deputy head of research for JI Asia in Tokyo. “It’s like musical chairs, and the good deals are taken by strong ones first, and there is not much left for the rest.”

Marianne Amssoms, a spokeswoman for AB InBev, and Jennifer Shelley, a spokeswoman for Mexico City-based Grupo Modelo, declined to comment after the Wall Street Journal reported late yesterday that AB InBev was in talks to buy the remaining stake.

SABMiller Downgraded

AB InBev rose 1.5 percent to 56.47 euros at 10:36 a.m. in Brussels trading. Modelo’s shares closed up 2.9 percent at 97.95 pesos in Mexico City on June 22, giving it a market value of 316.9 billion pesos ($22.9 billion).

A deal at $12 billion would be “attractive,” boosting earnings by about 10 percent, Pablo Zuanic, an analyst at Liberum Capitalin London, said in a note. Zuanic has a buy recommendation on AB InBev. ABI would have to pay $11.35 billion if it would be able to buy the stake at the market price, he said.

Competitor SABMiller Plc fell 1.9 percent to 2,456.5 pence ($38) in London trading. Liberum cut SABMiller to “sell” today on the grounds that speculation of a bid from AB InBev may fade. The Peroni beer maker rose the most in almost three years in October after a Brazilian website reported that it was in talks to be bought by AB InBev.

Next Step

“Modelo is the next best step AB InBev should make,” Gerard Rijk, an analyst at ING Groep NV in Amsterdam, wrote yesterday in an e-mail, saying it allows the company to profit from cost-cutting and so-called synergies.

Modelo, Mexico’s largest beer brewer, had sought to prevent Anheuser-Busch from selling its stake to InBev as part of the 2008 merger that also gave AB InBev nine of Modelo’s 19 board seats. At the time of the transaction, Modelo Chief Executive Officer Carlos Fernandez said that his company was interested in buying back Anheuser-Busch’s non-controlling stake, which the Budweiser maker bought in the 1990s.

In July 2010, Modelo lost an arbitration bid to deny board seats to some AB InBev directors. Mexican families including the family of Fernandez own a majority of a holding company that controls the brewer. Modelo has expanded in the U.S. and in other countries without using AB InBev’s distribution network.

“There is a risk that ABI would have to divest of some brands to keep market share under 50 percent” in the U.S., Ian Shackleton, an analyst at Nomura in London, wrote today. “There could also be restrictions on bringing the U.S. distribution of Corona in-house within ABI.” Modelo currently distributes its brands through a joint venture with Constellation Brands Inc. (NYSE:STZ) called Crown Imports LLC.

Comparative Value

Modelo’s market value gives it a price-to-earnings ratio of about 28.7, according to data compiled by Bloomberg. That compares with an average of 26.3 for peers in the industry. AB InBev trades at 19.

AB InBev has been formed by a series of takeovers to create a company with brands including Beck’s, Bass, Labatt Blue and Stella Artois. InBev itself was formed when members of AB InBev’s current management team, including Chief Executive Officer Carlos Brito, combined their Brazilian brewer Cia. de Bebidas das Americas, or AmBev, with Belgium’s Interbrew SA.

The company has cut debt from the Anheuser-Busch deal and agreed to buy control of Cerveceria Nacional Dominicana for $1.24 billion in April, adding the Dominican Republic’s biggest beermaker.

AB InBev isn’t the only brewer expanding into new markets. SABMiller (OTCBB: SBMRY), the world’s second-biggest brewer by volume, agreed to buy Foster’s Group Ltd. in Australia last year for about A$10.5 billion ($10.5 billion).

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Beer, Wine Or Whiskey? There's A Lot To Like About Alcohol Stocks

Orlando, FL 11/18/11 (StreetBeat) --There is quite a bit to like about beer, wine, and spirits stocks. Like tobacco, firearms, gambling and adult entertainment, booze stocks fall into that stigmatized segment of the market known as “sin stocks.” They also happen to be fabulous long-term investments.

Because of the social stigma of profiting as a purveyor of vice, many high-minded endowments, pension funds, and other large institutional investors are prohibited from investing in sin stocks, which tends to keep their price relatively low and their dividends relatively high. This means that sin stocks tend to have the characteristics of winning value stocks for those of us with no such moral qualms.

The proof is in the pudding. While there is no “Sin Index” for us to use for comparative purposes, the Vice Fund (VICEX) comes awfully close. The Vice Fund’s mandate is to invest primarily in tobacco, alcohol, gambling, and defense stocks, and over its life it has absolutely crushed the S&P 500 (see Figure 1).

Vice’s exposure to the gaming industry proved to be a disaster when the economy fell into a tailspin in 2008; had the fund avoided this sector and focused more heavily on booze and smokes, its returns would be off the charts. But even with the routing of the gaming industry, Vice’s 80 percent return since 2002 is double that of the S&P 500. It’s good to be bad.

Figure 1: Vice Fund vs. S&P 500

So, dear investor, with all of this as background, whadaya drinkin’? Beer, wine, or whiskey?

In the spirit of World Series baseball, we’ll start with beer. In recent years, the global beer industry has become highly consolidated and is now dominated by just four major players: Anheuser-Busch InBev (BUD), SAB Miller (SBMRY.PK), Heineken (HINKY.PK), and Carlsberg (CGBWF.PK). While a case can be made for any of these beer behemoths in a diversified portfolio, my recommendation is the Brazilian regional giant AmBev (ABV).

Ambev is owned by the much larger Anheuser-Busch InBev, but it trades separately on the NYSE as an ADR. The company has no net debt, and it absolutely mints money. Its return on equity for the trailing 12 months was an impressive 34 percent, and it's growing its earnings per share at a 20 percent per year clip. Not bad. Ambev is also a great long-term play on the rise of the South American middle class. As Brazil, Peru and other rising Latin stars continue to develop into modern economies, companies that profit directly from the legions of new middle-class consumers should do quite well. And Ambev, with its dominant position, is poised to profit quite nicely.

Next on the list is wine. Unfortunately, our options are somewhat more limited here. Unlike the global brew business, wine is much more highly fragmented. The industry is atomized into untold numbers of small vineyards, many of which are privately owned and not available to stock market investors. Of the vineyards that do have stock market listings, many primarily trade outside of the United States or are very thinly traded.

Still, investors can consider Constellation Brands (STZ). Constellation is not a pure play on wine, as it has some exposure to beer and liquor, but it is the largest wine company in the world.

In some ways, the demand story for wine is better than for beer, as wine should benefit from positive demographic trends. The Baby Boomers — the largest and richest generation in history — long ago passed the beer-swilling stage of their lives. They do, however, still enjoy a nice glass of wine with dinner. And Generation X and the much larger Echo Boomer generation have embraced wine at much younger ages than their forbearers. Perhaps it is because they are more health and body conscious (some would just say vain … I’m trying to be open-minded), wine is viewed as a less-fattening alternative to beer.

Constellation has had a rough year, seeing its profits shrink, but the stock is cheap at just 9 times forward earnings and it has a respectable return on equity of 26 percent.

Finally, we get to the hard stuff. Premium spirits stock British Diageo (DEO),is the owner the owner of Johnny Walker scotch, Crown Royal Canadian whiskey, Smirnoff vodka, and Tanqueray gin, among many others. As a seller of premium drinks, Diageo tends to sell to a higher-income consumer. As the “Occupy Wall Street” crowd has made abundantly clear, upper-income Americans and Europeans (and in this case I would include the top half of wage earners, not just the top 1% with which Occupy Wall Street appears to be obsessed) are doing just fine. The working classes are suffering; the professional and leisure classes are not. Whether we enjoy a robust economic recovery or sink back into recession, Diageo should do just fine.

Diageo is also a “backdoor” way to get access to the rise of the emerging market consumer. The company already gets a third of its sales from up-and-coming emerging markets in Asia, Latin America, the Middle East, and Africa, and this percentage will only increase with time. Diageo also pays a great (and rising) dividend of nearly 4 percent.

Whether your preference is beer, wine, or whiskey, consider adding some of these sin stocks to your portfolio. The returns should give plenty of cause for celebration.

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