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. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Investing

    5 Recession Resistant Industries

    No companies are completely recession proof, but some industries perform better in a weak economy than others.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  8. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  9. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  10. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  1. 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 >>
  2. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!