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