Has any stone been left unturned in the coverage of the ABI - Modelo situation? After the flurry of news from late last week and into this, we offer just a few more ideas to consider:
1. The DOJ says that Constellation historically wanted to raise prices while Modelo wanted to keep them the same, citing internal documents. But the DOJ didn't consider three important facts : 1. Modelo was making money on filling brewing capacity and supplying the beer. Breweries maximize profits when they are selling at peak capacity. So it behooved them to crank out more beer at a lower price while volume synergies didn't matter to Constellation. 2. The peso was becoming weaker at the time, which is a de facto price increase to Modelo. 3. Constellation had every reason to believe it was getting terminated in 2016, so it wanted to maximize value. 4. Regardless of whether the merger goes through or not, Modelo prices are likely to go up as the peso is stronger and Mexico sees cost inflation.
2. Most people have identified three main paths the deal could take: A. ABI walks away (yeah right). B. ABI and DOJ negotiate a remedy that both can swallow (seen as most likely). C. Litigate in court.
Interestingly, at least one analyst would prefer ABI to walk away than to try to litigate. Citi writes that "we believe either A or B would be favourable. If A were to happen, there would be no downside to our numbers and ABI would have the optionality to use its balance sheet as it sees fit, to buy back or to do another deal, benefiting shareholders in either case. With B we also see upside - the Modelo acquisition would be back on, even if the remedy would dilute the benefits, with a net upgrade to EPS perhaps in the mid-single digits." Why not take its chances and litigate? Citi believes it would be "less favourable because the uncertainty would probably cap the shares for many months" as it would likely be a drawn out trial.
But we must remember that ABI is on the hook for a $650 million breakup fee if the deal doesn't close. So even the most expensive trial may be worth it.
But wait? Is there a fourth path? The deal has been approved in Mexico and in every other country. Could ABI go ahead and consummate the deal without US approval? Why can't a Belgian and Mexican company unite in every place except the US? That's a messy legal question, but one that needs to be asked.
3. The other downside to a long trial : Press access to a host of public court documents with lots of internal emails and marketing plans revealed. Yes, the DOJ has shown in recently successful court actions that it relies heavily on internal documents to prove its points -- a bonanza for trade publications, but a nuisance for the companies involved. Even the DOJ initial complaint had sensitive emails between Bill Hackett and Rob Sands in it. But on the other hand when you're talking about billions of dollars, a few revealing emails are but a small price to pay.
4. If nothing happens and we're back to the status quo, then what ? Tony Bucalo at Santander has an interesting scenario: SABMiller steps in and buys Modelo. It seems to me that SABMiller would have to pry Modelo out of Brito's cold fingers, but Tony writes in a note that SABMiller could "meet the financial needs of the Modelo families" and buy both stakes, and selling off MillerCoors stake to Molson Coors for $9 - 10 billion to help pay for it. That would then allow ABI to buy PepsiCo. (Or they could just pay out a huge dividend).
5. When I was a guest on an overseas financial show last week, it seemed to me they don't seem to grasp the new political reality over here. It's completely lost on them that the newly appointed Bill Baer of the DOJ's antitrust division has somewhat of a mandate from the Obama Administration to take on big business and stop big mergers. Baer was nominated 11 months before his confirmation by the Senate to fill a vacancy in the position that dated from August 2011, when Christine Varney resigned. He has been entrusted with "reinvigorated enforcement of antitrust laws after a period of lax oversight during the Bush administration," the New York Times' Peter Lattman wrote at the time of his confirmation. The DOJ has seven, count 'em seven, civil antitrust cases in litigation, and over the past ten years there have only been four. Also if you think beer is a small industry, one of the cases they're pursuing is a hop-on tour bus company in New York City buying another hop-on tour bus company. Yes, the DOJ is in litigation regarding the hop-on bus industry in NYC. I didn't even know they had those in New York. London yes, but New York?
5. Nobody knows what is going to happen if they go to court. Nobody. One professor, Glenn Macdonald at the Washington University told the St. Louis P-D: "The proposition is very reasonable, and I think [ABI will] beat [the DOJ] in court." On the other hand, Daniel Sokol, professor at the U of Minnesota, told CNNMoney: "What wins in court is when you have bad documents and a story to tell a judge. They [DOJ] seem to have nailed that."
But we can say this: The DOJ has only a 50% success rate when they litigate. Over the last ten years they've only litigated four cases to completion, and they won two, which were cut and dried high market share acquisitions. In a complex case like this one where it's unclear how having an independent Crown hurts the consumer, especially when ABI already has a 25% indirect ownership of Crown today and would have 0% ownership after the deal, you have to like ABI's odds in court.
Still....... ABI and Modelo are in a very tough position, and by extension Constellation/Crown is too. In fact, you have to feel for Crown Imports and their people, who through no fault of their own have been thrust into this volatile situation. The only medicine is press on and sell beer as if none of this is happening, which is what I expect they are doing.
A-B RETURNS TO NO. 1 SPOT IN AD METER
After taking a year off of the focus on Clydesdales, A-B got a big win with their sentimental "Brotherhood" spot which had all the ladies piping their eyes at our Super Bowl shindig. It won the top spot in the expanded USA Today AdMeter, just beating out the Tide Joe Montana stain spot. The Bud Light ads rated in the middle of the pack, while the Black Lager and Beck's Sapphire spots rated toward the bottom, although we should note those spots weren't designed nor given the budget to win awards, but rather to just build instant awareness, which clearly they did.
The Wall Street Journal's poll of ad professionals also rated the Clydesdale spot well. "Over 100 million people are holding back tears right now," said Dean Crutchfield, a branding expert. The mare is actually a colt named Hope, see below.
MILLERCOORS LAUNCHES NATIONAL TV WITH THIRD SHIFT
"Trade-up craft grew 20 percent in 2011 and 27 percent in 2012. And this growth isn't driven by craft drinkers looking to save a buck, it's fueled by mainstream drinkers looking for variety." So writes Ed McBrien and Andy England of MillerCoors regarding the raison d'être of Third Shift, their new amber ale that is rolling out nationally, in a memo to distributors obtained by BBD. They write that Third Shift is off to a "blazing start" with "strong distribution and high velocity." It's gotten better-than-anticipated chain support. Andy and Ed say that they will be airing national TV ads for the brand from Feb.18 through Labor Day (including the premiere of The Walking Dead, Late Night with Jimmy Fallon and Last Call with Carson Daly.
HOW DOES MILLERCOORS DECIDE WHICH BRANDS TO PUT IN TENTH & BLAKE AND WHICH TO PUT IN BROAD MC ORG?
That has been a question a few distributors have been asking of late, with some scratching their heads as to why Third Shift or Redd's Apple Ale are not in their specialty Tenth and Blake division, and Batch19 is?
In a note to distributors on Friday, MillerCoors chief Tom Long gave the "short story." Basically, Tenth and Blake was created to "primarily build out two craft breweries and the brands inside them: Blue Moon Brewing Company ... and Jacob Leinenkugel Brewing Company". Tenth and Blake was also created to "build craft and specialty selling and merchandising capability that is required in today's marketplace to support our 'create, build and expand' model needed on brands like Batch19 and Peroni." In short, Tenth and Blake was created to nurture brands that require that kind of hand-selling.
The broader MillerCoors organization, on the other hand, "launches brands with firepower and scale marketing that demands scale distribution. It unapologetically launches brands for the masses." That's why Third Shift and Redd's are there, and that's why they are getting big national support behind their launches. They are "big bets behind brands with big potential," writes Tom.
ALABAMA CROWN DISTRIBUTING of Birmingham, Alabama has sent a stern letter to A-B, we understand. The blue-silver distributor is a Bass distributor for most of the state, and it turns out A-B has assigned Bass IPA, a line extension, to the red network. That isn't kosher with Alabama law.
A-B IS ROLLING OUT Stella Artois Cidre in certain markets in mid-May, to be brewed at their Baldwinsville plant. Four packs of 12oz bottles selling for recommended $7.49 PTC, and 24 oz. bottle $5.99 PTC. Cider is big, and getting bigger. This is proof that the big boys are serious about it.
KEYSTONE LIGHT is rolling out its new packaging tomorrow with the wide mouth cans and a refresh of their packaging graphics.
CORRECTION: Yesterday we wrote that ABI expects synergies with the Modelo acquisition of 600 billion. If that were the case, the deal would be done by now, DOJ or no DOJ. But in fact the synergies are expected to be $600 million.
PIPING ALL HANDS. We're still getting an awful lot of mail at our old mailing address, and the post office is being very cagey/incompetent about forwarding, so please let your admin office know that we've moved offices to: 909 NE Loop 410, Suite 720, San Antonio, TX 78209. Thanks.
BREWPIC. She's 21 days old, already weighs 200 pounds and starred in the Super Bowl commercial for Budweiser. Her name is "Hope," a nod to the happy ending of the ad and submitted in a Facebook contest. That's Jimmy Buffett holding her. (Not really, don't know who that is actually).
Until tomorrow, Harry
"The art of medicine consists in amusing the patient while nature cures the disease."
-Voltaire (1694 - 1778)
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