ABI To Sell Piedras Negras

FILED FEBRUARY 14, 2013

Dear Client:

ABI and Constellation Brands late last night announced a revised agreement where ABI has agreed to sell the giant Piedras Negras brewery and grant perpetual brand licenses to Constellation for $2.9 billion, (9 X EBIDTA). "The sale of the brewery, which is located near the Texas border, would ensure independence of supply for Crown and provides Constellation with complete control of the production of the Modelo brands for marketing and distribution in the U.S."

The two parties have agreed to a three-year transition services agreement "to ensure the smooth transition of the operation of the world-class brewery, which is fully self-sufficient, utilizes top-of-the-line technology and was built to be readily expanded to increase production capacity," said a release. During this 3 year timeframe, Constellation plans to invest $400 million to expand the Piedras Negras facility, which will then enable it to supply 100% of Crown's needs for the U.S. marketplace. Today, Piedras Negras fulfills approximately 60% of Crown's current demand.

"The AB InBev and Grupo Modelo transaction has always been about Mexico and making Corona more global in all markets other than the U.S., where the brands will be owned and managed by Constellation," said Brito. "We are pleased to have reached this revised agreement that preserves the merits of the Grupo Modelo transaction while allowing us to move expeditiously to the Modelo integration process and the capture of approximately USD 1 billion of synergies, up from our original estimate of USD 600 million."

That's a big price, and a big number. $4.75 billion. Can STZ do it? "Constellation has fully committed bridge financing in place to complete these acquisition activities. Permanent financing is expected to consist of a combination of senior notes and term loans, with the remainder of the funding coming from the company's existing revolving credit facility, accounts receivable securitization facility and available cash."

The ten year buy-back provision has been dropped from this deal. "Constellation's purchase of the Piedras Negras brewery provides it with complete control over production of Corona and the Modelo brands sold in the U.S.," said ABI.

"We believe these significant alterations sure should meet the DoJ's concerns," said Trevor Stirling of Bernstein, "ensuring the complete independence of Crown Imports (similar to when InBev sold the Labatt brand in the US to perpetuity along with the underlying production assets when they acquired Anheuser-Busch in 2008). Removing the 10-year call option right as well as selling the underlying production capacity to Constellation Brands should address the concerns about the supply relationship and the related concerns about impact on pricing as well as ensuring the complete independence of Crown Imports as a brewer on their own, increasing significantly the likelihood of reaching an agreement with the DoJ."


A PEEK INSIDE THE LIQUOR WORLD

Attending the Cheers! on-premise operators conference in Dallas this week, it became clear that one of the main reasons hard liquor is taking share from beer is also one of the most divisive issues in the beer industry right now: SKU proliferation. New flavors - whether its vodka, rum and even whiskey - is one of the biggest growth drivers in the spirits industry. Meanwhile, in beer, people worry that the growing number of craft brands and seasonals is bad for business. Is that a mistake?

Consider this: Liquor saw the most growth in the on-premise last year (about 1.8%). Beer, meanwhile, climbed 0.5% to 2.8 billion 2.25 gallon cases. That was driven largely by craft (up 11% on-premise in 2011) and super-premiums. Coors Light was the only major light beer to post growth last year, up 2% in the on- and off-premise in 2012, according to data in the Cheers On-Premise BARometer Handbook.

The top trends across all sectors in the alcohol industry are this: local, artisanal, authenticity, and variety. That last one is key. "People want to try new products," said Brandy Rand, who is the writer/editor of this year's BARometer Handbook. "And not just that - they want the discovery element. How else do you create discovery without introducing new things to try?"

Of course, we're not suggesting that beer isn't doing that. Our industry saw a bottle number increase of 8% last year on-premise. The average number of craft beer tap handles has grown from 5 in 1999 to 13 in 2011 per on-premise establishment. Also, new liquor SKUs are more efficient than beer, with more volume sales per SKU.

However, the spirits industry is doing a great job at generating excitement. The cocktail resurgence we saw with the speakeasy/mixologist movement over the past decade is still in tact but evolving in a way that's actually better for spirits. The idea of the "precious cocktail" that takes 15 minutes to make is going away, said Brandy. Instead, people want simpler cocktails with 4 ingredients or less, preferably with some esoteric spirit made 3 miles away or across the globe (go figure) that they've never heard about.

Hand in hand with the easier-to-make-cocktail is also a growth in wine, cocktails and spirits on tap. Some accounts are even bottling cocktails in advance to help preserve freshness, consistency, and cut back on production time.

There is also an anti-sweet backlash against the Pinnacle Vodka Whips of the world as more consumers are gravitating towards savory and bitter. This trend is driving the growth of Campari, Aperol, Fernet and bitter IPAs. IPAs have grown share from 2.8% in 2009 to 8.7% in 2012, said Adam Rogers, senior analyst at The Beverage Information Group.

They are also seeing big growth for American whiskey (Jack Daniels, rye, corn whiskey) and bourbon (Maker's Mark, Jim Beam). Flavors like Red Stag by Jim Beam (cherry flavored), Wild Turkey American Honey, Evan Williams Cinnamon and Jack Daniel's Honey have created a whole new flavor category in brown spirits and brought in new consumers. Interestingly, small-batch bourbons like Woodford Reserve and Diageo's Bulleit are bringing double-digit growth (12.2%). Even Canadian Whisky got a boost last year with Crown Royal Maple. And while the gin category continues to struggle, brands like Hendrick's (up 45.6%) that use other botanicals to offset the juniper are gaining attention. Meanwhile, the proliferation of flavors continues to be the biggest driving force in the largest spirits category of all: vodka. Flavors made up 1 million cases in 2012.


ALTERNATIVE PRIVATIZATION MOVE IN THE WORKS IN PA

Pennsylvania is once again looking at privatization, even in the wake of the disaster in Washington State. Last month Pennsylvania governor Tom Corbett unveiled a plan to privatize the state's alcohol industry. The plan, which has yet to even be introduced in the legislature, has come under harsh scrutiny already.

For example, beer distributors largely oppose the move because it would increase competition from retailers. "It would really dilute the marketplace. As far as Pennsylvania beer distributors, we all have to be small, family-run businesses. We can't own more than one outlet. You are asking us in a new world to compete against Walmart and Costco, plus other major chains of liquor stores that would move in. That would be difficult to compete against," Tom Bowman, owner of Beer Express, told The Patriot-News.

And The United Food and Commercial Workers Local 1776, the most vocal opponent of privatization, continues to put out stinging press releases almost daily. One of the more recent ones aimed at a poll showing that privatization had "moderate support" with 53% of people rating it favorable. "This poll reflects a steady loss of support for reckless privatization schemes that have been introduced in recent years," wrote the group. Wendell Young, president of United Food and Commercial Workers Local 1776 claims the number of consumers satisfied with the selection, convenience and prices at state-owned shops is actually 70%.

Now there is a Senate bill in the works that may provide an alternative avenue for those not willing to full-scale privatize. The Senate bill currently being drafted would keep stores under the state umbrella, but give hotels and restaurants more flexibility, and allows beer distributors to sell beer in quantities less than a case, reports the Tribune-Review. More specifically, the bill would allow restaurants and hotels to have carry-out licenses for wine and spirits. It would also allow special licenses that would enable the holder to sell bottles of liquor and wine for "consumption off premises... in any quantity." Chains stores would get one license for one location. In comparison, the governor's plan would see the sale of 609 state stores and auction 1,200 retail licenses.

Since 0pposition to selling off the state stores is high among lawmakers who worry about displacing 5,000 employees, it's possible that this Senate bill will get more serious consideration. Some believe there's a middle ground somewhere between the two plans. We'll be watching to see how this one plays out.

Until tomorrow, Harry

"Take care of the luxuries and the necessities will take care of themselves."
-Dorothy Parker (1893 - 1967)


--------- Sell Day Calendar ----------
Today's Sell Day: 10
Sell days this month: 20
Sell days this month last year: 21
This month ends on a: Thurs
This month last year ended on a: Wed
YTD sell days Over/Under: 0

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