FILED JUNE 29, 2012

Dear Client:

We rang up Crown Imports chief Bill Hackett earlier this morning, who echoed what Brito said about Crown being autonomous. Says Bill:

"I will tell you, Harry, the fact that we've got the security and certainty of being the long-term player here has got everybody juiced. I don't know if we could be in a better position. We have a team here that knows this business. And for us to be able to have the security of this agreement, it's a home run for everybody."

Crown chief sales guy Bruce Jacobson added, "We've always treated the brands as if they were ours. And this helps us extend that so that we can continue to do the right things for the brands."

Bill stressed that this new deal gives them even more autonomy than before. "It's more than just being the importer," says Bill. "We will be the brand owners in the United States. We will have full authority and autonomy for marketing, sales, pricing, distribution, promotions. We'll make decisions on what brands and SKUs we bring in from Modelo. They will have no influence on any of these issues..... We had the opportunity to sit down and assist the Constellation team in building out the agreement to make sure the right checks and balances are in place to be able to run our business independently without any challenges from ABI."


Crown's momentum in 2011 has kept pace in 2012. "We're up over 10% year-to-date through May," said Bill. "June is a bit tougher due to the July 4 timing in the middle of the week, but we expect to be up in June..... What really gets my attention is the way Corona Extra is performing. It's up 8.5% year-to-date, and that's a real turnaround. That coupled with Modelo Especial, which is up over 20%, is really driving the business." Chief marketing officer Jim Sabia added that they've been on TV throughout the NBA finals, and that the new "Corona Light advertising is really breaking through."

"This is the ninth consecutive quarter that Crown has outperformed the industry," said Constellation chief Rob Sands. Crown's net sales are up 7% in the March through May fiscal quarter.


Analysts are almost universally praising the ABI / Modelo deal, and also note that Constellation got a steal in buying out the Crown stake for 8.5x EBIT while other beer deals are going for 10-11 x. For Constellation, UBS analyst Kaumil Gajrawala notes that this deal is "better than our best case scenario." He adds, "Long-term, we believe this deal is a game changer for STZ as it removes an important overhang on the stock, diversifies their revenue base, doubles their equity income from Crown, and gives the company a more significant foothold in the US beer market. Additionally, as an independent operating company, Crown now has the option to pursue importing rights on other international brands."

Stifel Nicolaus' Mark Swartzberg says they "consider the transaction a positive to ABI (BUD: Buy, $73.79) and lift our 12-month target to $94 per share."


The deal is expected to close in the first quarter of 2013, we must note that the U.S. government still has a significant say in how the ultimate deal is structured. Bernstein analyst Trevor Stirling warns there are still significant hurdles. While ABI is selling the Crown stake, "we think it may not be enough," he writes, noting that the DoJ required the disposal of Labatt and requiring ABI to arrange for Molson Coors brewing Labatt for the U.S. The DoJ could require "a new manufacturing solution, maybe the disposal of a Mexican brewery to Constellation or a third party, or theoretically CCM/Heineken could end up brewing Corona and the other brands destined for the USA! Clearly an extreme solution such as this could necessitate the renegotiation of the deal and might even be a deal-breaker."


In what is the second largest deal today, MillerCoors' spokesman Pete Marino told BBD that they have purchased some of the assets of the Michigan Brewing Company at auction with the "primary intention of acquiring their brewery equipment, which is in excellent condition," he said. They also acquired some brand names in the mix. "Given the rapid expansion of a number of Tenth and Blake brands, we decided an asset purchase would provide us with added small batch flexibility moving forward. We haven't decided what, if anything, we might do with the brands at this point. It's important to note, we do not own the brewing facility, just the equipment and the brands." Presumably, the US Justice Department won't have an issue with this deal.

CORRECTION: We reported earlier this morning that premium lights are up 1%, when really what we meant is the entire beer category is up 1%.

Until tomorrow, Harry

"This is a fantastic result. We will become a part of the most significant beer business in the world."
-Grupo Modelo chief Carlos Fernandez on ABI deal

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