The Case for ABI - Modelo


January 11, 2013

Dear Client:

We reported earlier this week the bear side of the ABI - Modelo - Constellation deal. Now let's focus on the bull side -- that being those who say that the deal will close without a hitch as planned in the first quarter of 2013.

ABI IS SINCERE. BBD spoke with several analysts who have unanimously stressed that ABI and Constellation have consistently reiterated that the deal will close in Q1. Of course, ABI is under no obligation to tell them otherwise, and they have every incentive to remain publicly optimistic. But the analysts we spoke with all seemed convinced that ABI is being sincere.

LOOK WHO'S TALKING. Here's a point that an analyst made: The folks involved in structuring the deal aren't talking and the DOJ isn't talking. So who does that leave? The folks who are talking are the people who are outside the deal who are casting about for any platform to air grievances against ABI, or otherwise people who are philosophically or politically against mergers.

THE BULL ARGUMENT. The bull argument is that this is merely a US company (Constellation) buying out its joint-venture partner (Modelo/ABI). How does that change the competitive landscape? Yes, ABI would make money brewing Modelo brands under contract for Constellation, but then again ABI makes money today by having a 25% stake in Crown through its 50% stake in Modelo, so profit-wise it's likely a wash. What changes? ABI makes the case that it actually has a smaller footprint in the US after the deal. The analysts seem to agree.

NO DOCS. The other data point that we've uncovered is that the DOJ doesn't seem to be taking sworn affidavits or asking industry participants for a lot of documents as they did during the Labatt purchase. This would seem to indicate that the DOJ -- despite staffing up -- is not preparing to sue to stop the acquisition in court.
ANALYSTS BULLISH. UBS raised its full year earnings estimates on Constellation and wrote regarding the pending deal: "We continue to believe the deal does not present material antitrust concerns and that ABI will have less influence on Corona sold in the US than they do today."

Mark Swartzberg at Stifel Nicolaus writes, "We reiterate our Buy recommendation [on STZ] and believe the company's reaffirmation of an expected calendar 1Q13 close on the Crown Imports acquisition is not a hollow reiteration, in contrast to worries the proposed deal may be derailed or adversely changed."

If the DOJ buys ABI's arguments that this is just a contract brewing arrangement and that the competitive landscape remains unchanged or even improved, ABI may be able to close this deal without major concessions.

Also, consider this: If the deal doesn't happen, then what? ABI would still own 50% of Modelo. Modelo would still own 50% of Crown. Before this deal was announced, it was assumed that at some point Modelo would buy out Constellation's stake in Crown. Could Modelo buy out Constellations' stake in Crown if the deal doesn't happen? Would the DOJ allow that given ABI's stake in Modelo?

And consider this: For the deal to be completed in the first quarter, ABI and Modelo and Constellation need about four weeks after DOJ approval to get things done. That means approval needs to come in the next 30-40 days. Stay tuned....


A-B will debut four-and-a-half minutes of new ad creative during CBS's broadcast of Super Bowl XLVII on Sunday, February 3. Budweiser Black Crown and Beck's Sapphire will both get spots, with Black Crown getting the A1 spot just after kickoff and another 15 second ad later in the game. Two teaser ads for Budweiser Black Crown will also air during the NFC and AFC Championship games on Jan. 20, one day before the brand hits shelves nationwide. Bud Light ads will continue with the "Superstitious" campaign, and Budweiser will return to heartstrings with a 60 second clydesdale ad.

BBD spoke with A-B marketing chief Paul Chibe about the ads and the brands.

BBD: How big do you think Budweiser Black Crown could be? It won't be as big as Platinum, right?

PAUL CHIBE: The excitement around Budweiser Black Crown is enormous. It's almost a different kind of buzz, even among friends of mine. There's a lot of energy that I didn't expect. So you never know, because we never knew how big Platinum was going to be. I wouldn't bet against it. One of the things that made Platinum so successful was that it was a great beer. When I taste Budweiser Black Crown, it's also a great beer. If you're a technical marketer, you would say it's going to be smaller because Budweiser is smaller than Bud Light. But at this point I wouldn't bet against Budweiser Black Crown. It's a great beer with some great marketing behind it.

BBD: As an amber lager, it appears as though you're targeting full calorie lagers like Yuengling or Shiner....

PAUL: Not necessarily. It's not about targeting a specific beer or style. When you look at what Black Crown is, it is a fuller more flavorful beer with more alcohol than Budweiser. But I'm looking for a broader opportunity for occasions that I'm not in, or even occasions that beer isn't in. As a category leader, if all I do is take barrels from other people and not grow the category, I'm not doing my job. We're very much interested in growing the category.

BBD: Both Black Crown and Sapphire are 6% abv. The higher alcohol thing seems to be what young adults are attracted to these days......

PAUL: That is not what we're focusing on from an attention standpoint. We have a lower ABV version of Platinum in 3.2 states and it performed just as well in those states. It's more about the beer. While we're working on our beer, there's a range of brews you try out, to bring out the complexity. In terms of designing for higher ABV, that's not what we're trying to do.

BBD: For Bud Light, you're sticking with the "Superstitious" campaign for the big game. Do those ads test well?

PAUL: They've tested extremely well on Bud Light. When I look at the brand health, it's performing extremely well. When I look at how the brand has grown with its association with the NFL and football, the ads have been extremely effective. You're capturing an insight into what people do when they're a football fan -- you're capturing that in the ad. If you don't do it yourself, you know someone who has a ritual around their team..... that's resonated well with people, and they share their stories. So it's built around a real truth, and we're doing it in a big fun humorous way for the Super Bowl.

BBD: Will social media be a big component on the back end?

PAUL: Absolutely. When you look at the marketers who are really doing their best out of getting the value out of the Super Bowl, social amplification is a big part of their work. We're using social more and more and that type of activation to get the best return on our investment.

BBD: Isn't it unfair to use baby clydesdales in ads? That's cheating.

PAUL: They represent a lot of our values: trust, loyalty, friendship, those are all the emotions that people associate with that majestic clydesdale horse. A lot of people might infer that the clydesdales aren't critical for us, but our activation of the clydesdales increases year after year. I think a lot of people tried to infer that because they didn't get their own ad in last year's Super Bowl -- although they were fundamental to the story of beer being delivered to the capitol in Washington DC after repeal. This year, instead of being a part of the story telling, they will be central to the story-telling. The clydesdales are alive and well. We feel they are very special and we plan on carrying that tradition forward.

BBD: Budweiser lose some of its stabilization in trend last year with the focus on the launch of Platinum. Will Black Crown create a halo effect for Budweiser, or could it cannibalize it further?

PAUL: Any time you launch a brand extension, you're going to have cannibalization. The question is whether the cannibalization you have is more or less than you expected. Now, on Bud Light Platinum, the cannibalization was at or less than was expected. And the mega-brand performed extraordinarily well from a share perspective. When I look at the Bud Light base, it was cannibalized by Platinum, but less than I expected. So the thing is that Budweiser Black Crown, of course there's going to be cannibalization. That's true of any category..... but what you have to do is drive incrementality as much as you can. In my view, I think Black Crown will continue to build upon the imagery of Budweiser as we try to keep the brand very premium, and making sure that we're presenting our brand in an aspirational way.

BBD: You're including an ad for Beck's Sapphire, presumably a pretty small brand..... did you ever consider using an ad for a larger brand, say Stella Artois?

PAUL: Beck's Sapphire is a special brand. It's brewed with Saphir hops, and we're treating it as a jewel, and as a brand marketed by a jeweler.... For the Super Bowl, it's about awareness. When I look at what my priorities are, I have an opportunity to get awareness very quickly on the Super Bowl. We have plenty of efforts on Stella Artois as you know Harry, and so when I'm making choices, I can't pass up that opportunity to get the instant awareness on Beck's Sapphire on the Super Bowl.

IN OTHER SUPER BOWL SALES NEWS, A-B and PepsiCo are planning to promote their products together in some chains. Displays and ads will jointly promote Pepsi, Doritos, and Bud Light. A mail-in coupon touts an $8 rebate. "In-store marketing and merchandising is getting more and more important, and having these three brands on the same displays could potentially be very powerful," said John Sicher, publisher of Beverage Digest to Ad Age. "Based upon what I've heard from Pepsi bottlers, they believe this could have strong competitive potential."


Lee Dolan has resigned from Tenth and Blake to lead brand marketing efforts at sportsman's retailer Cabela's, writes Tom Cardella in a note to distributors. "For the past 14 months, Lee has led sales and marketing for Tenth and Blake. We want to thank Lee for his contributions over his 17-year career at MillerCoors. This opportunity will challenge Lee in a new industry a bit closer to his home in Denver. Lee's last day will be Tuesday, January 22." Tom said they will be separating sales and marketing into two positions, with both reporting to him.

Craig Morris has agreed to take on the interim role as head of sales, and Regional Managers Craig Consigny, Mark Mulhall, Rene Ramos, Trevor Straker and Rocco Colangelo Jr. will report to him in addition to his current chain account team. Craig has most recently served as Tenth and Blake's director of national chain and customer solutions.

The Tenth and Blake marketing teams will continue to be led by Brand Directors Libby Mura and Brad Johnson, reporting to Tom.


Former ABI vp investor relations Robert Ottenstein has joined ISI Group as head of their global beverages group and has initiated coverage of several beer stocks. In a twist, his top stock pick is SABMiller as a "strong buy", with its strong 13% EPS growth. Interestingly, Robert sees the market as perceiving SABMiller as AB InBev's "next target" in 2015 - 2016. Robert rates ABI as "superior", also with 13% EPS growth over the next four years as he sees a continued US market rebound and a dividend increase.


NEW SHOCK TOP HITTING SHELVES. Shock Top Honeycrisp Apple Wheat hitting shelves this week. A-B describes it as a "crisp, refreshing, and flavorful hybrid of beer and sweet cider that combines the taste of Shock Top Belgian White beer with the sweet, slightly tart, apple profile of a cider."

I REGRET TO REPORT that longtime Texas wholesaler Robert Gentry, 81, passed away on Monday in Lubbock, Texas. He started Great Plains Distributors, a Coors distributor, with his brother Bruce Gentry, Jr in 1961. He also co-founded and remained an owner of Heritage Place Equine Sales Company in Oklahoma City, Okla. He will be sorely missed.

Until tomorrow, Harry

"The thing I hate about an argument is that it always interrupts a discussion."
-G. K. Chesterton (1874 - 1936)

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