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Anheuser-Busch InBev NV Might Spend U$7 Billion To Buy Corona


Anheuser-Busch InBev NV, the world’s largest beer brewer, has plans to buy Mexican beer Corona as the next takeover target in an attempt to repeat the formula to grow income through cost-containment in a stagnant market.

Last week, AB InBev declared that beer sales were below analysts’ estimates. Andrew Holland, an analyst at Evolution Securities, stated that to continue benefiting from cost cuts – as benefits of Anheuser-Busch acquisition are declining – AB InBev may try to buy the 50% that it still doesn’t own from Grupo Modelo, the makers of Corona – a stake worth about U$7 billion.

Carlos Brito, president of AB InBev, said the company has “plenty to do” in the Americas. Femsa, Modelo’s only competitor, is discussing the sale to SABMiller and Heineken.

“I’m sure they already have their eyes on another purchase opportunity”, says Holland about AB InBev. He said the results released on Thursday show that the brewery, unlike its competitors, increase its profits mainly through cost cuts, not by its successful marketing campaigns.

“It’s just InBev that can’t seem to do both. We wonder if the company’s obsession with cost containment has implications in their ability to increase revenues,” said Holland.

AB InBev said it increased third-quarter earnings by 11.9 percent on a so-called organic basis by reducing U$265 million of expenses- with layoffs in Anheuser-Busch factories and using a single advertising agency.

The focus on reducing costs is even more urgent, as income has dropped 10.4% – since Americans are switching to cheaper beers. This performance was below analysts’ estimates.

Brito, Dutra and other Brazilian executives who run the AB InBev, are known for an approach called ‘zero-based budgeting’ in which budgets for individual activities or departments are not automatically transferred each year. On Thursday, they left unchanged the goal of saving U$1 billion this year, disappointing some analysts.

In addition to Anheuser-Busch, Brazilians also used ‘zero-based budgeting’ when combined AmBev with former Interbrew to form InBev, delivering four years of stock gains between 2004 and 2007, despite the soaring price of barley and aluminum – used in beer cans.

If AB InBev turns its attention to Mexico, it will have an important role in the world’s sixth largest beer market by volume. The Belgian company inherited its half stake in Modelo from Anheuser-Busch. The other shareholders include six Mexican families and the remaining stocks are traded on Mexico’s stock exchange.

“AB InBev definitely wants to do this deal and they’ll certainly be in a position to do so within 12 months,” said Trevor Stirling, an analyst at Sanford C. Bernstein in London. Until then, the world’s largest brewer will have paid enough debt to buy full control of Modelo, he said.

Modelo, whose Corona is the best-selling imported beer in the U.S., announced last month a 32% growth in profit and beating analysts’ estimates by increasing domestic sales, in spite of the economic fall. The Corona brand is strong enough so that, in August, Modelo announced it has no plans to reduce prices in the U.S. during the recession.

One obstacle may be the arbitration taking place between the two companies. Modelo wants U$2.5 billion in damages, a claim that originally tried to prevent Anheuser-Busch from selling its 50% stake in the company to the former InBev NV. However, Melissa Earlam, an analyst at UBS in London, believes the parties will settle their dispute before the end of the year.

For AB InBev, Mexico “would be their highest M&A priority” once enough debt is paid, says Earlam. “We believe AB InBev will negotiate with Modelo soon”

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Tuesday, January 23, 8:06 pm

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