The big news on June 29 was Anheuser-Busch InBev's (NYSE:BUD) announcement that it was buying the remainder of Grupo Modelo for $20.1 billion, putting both of Mexico's big beer companies in the hands of European's. Like the Heineken (OTC:HINKY) deal for Femsa's (NYSE:FMX) beer operations in 2010, Anheuser-Busch InBev gains full access to the sixth-largest beer market in the world. The secondary bombshell: Grupo Modelo is selling its 50% interest in Crown Imports to Constellation Brands (NYSE:STZ) for $1.85 billion. Despite antitrust concerns about the Bud deal, I'm not sure many people saw Constellation stepping up to the plate. It's a game changer for sure. Here's how it affects shareholders.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Complete Control
By securing the 50% it didn't own in Crown Imports, it gains complete control over marketing, distribution and pricing of the Modelo brands in the U.S. With Anheuser-Busch InBev out of the picture, it will be able to expand its position as the number one beer importer in America by selectively adding brands from other parts of the world. Until now, its relationship with Grupo Modelo was strained because beer buyers likely viewed Crown Imports as a subsidiary of the Mexican beer maker, rather than an independent company. Now Bill Hackett and his team can extend its relationship with retailers beyond the Modelo brands, confident that those retailers will view Crown Imports as a true partner. With 10-year terms in place perpetually, Anheuser-Busch InBev has expressed its complete satisfaction with Crown's ability to grow the brands in America. In the near term, Constellation shareholders have nothing to fear.

SEE: Beer Nation

Cost of the Deal
Constellation will finance the deal with revolver borrowings, a new term loan and senior notes with a cost of debt between 4% and 4.5%. Its debt-to-comparable basis - EBITDA ratio at the end of May, was 3.9 times and will increase to 4.5 times by the time the deal closes early next year. While it will have more debt, it will also have greater cash flow because it's incorporating 100% of Crown's earnings and not just 50%. Therefore, within 12 months of closing the deal, it should have debt levels below where they are today. More importantly, Crown's return on assets is significantly higher than its wine and spirits business. Consolidating 100% of Crown's earnings, it will have revenues in 2013 of more than $5.1 billion with operating profits greater than $1 billion making the debt issue a non-issue.

The negative for investors is that its share repurchase program goes on hold until the integration is complete. Even that's not a big concern, because Constellation's stock is near an all-time high, and is so strong that it's a shame they couldn't have paid for part of the deal by issuing additional shares.

SEE: Analyzing An Acquisition Announcement

The Bottom Line
The only possible downside I see with this transaction is the fact Constellation is hitching its cart to the U.S. beer market, which hasn't been kind to big producers in recent years. In 2011, the overall beer market saw volumes decrease by 1.3%. Yet craft brewers saw volumes increase by 13%. Obviously, it's going to take years for the craft beer industry to come anywhere close to matching the volumes delivered by Anheuser-Busch InBev. However, when that day comes, its investment in Crown won't be nearly as attractive. But that's a long way off. For now, shareholders can be thankful for the great news.

SEE: Holiday Beers That Won't Break Your Budget

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Home Depot's Return on Equity (ROE)

    Discover what Home Depot's return on equity (ROE) ratio says about the performance of the company and how it relates to historical averages and industry trends.
  2. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  3. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  4. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  5. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  6. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  7. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  10. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center