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Anheuser-Busch Inbev SA/NV (BUD)

February 14, 2013 8:30 am ET

Executives

Carlos Alves de Brito - Chief Executive Officer and Member of Executive Board of Management

Felipe Dutra - Chief Financial Officer and Member of Executive Board of Management

Analysts

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Chris Pitcher - Redburn Partners LLP, Research Division

Anthony J. Bucalo - Grupo Santander, Research Division

Nik Oliver - BofA Merrill Lynch, Research Division

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Andrew Holland - Societe Generale Cross Asset Research

Alice Beebe Longley - The Buckingham Research Group Incorporated

Kris Kippers - Petercam S.A., Research Division

Lauren Torres - HSBC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the AB InBev Investor Call Anheuser-Busch InBev and Constellation Brands Announced Revised Agreement. The presentation is also available on the AB InBev website, www.ab-inbev.com.

Hosting the call today are AB InBev Chief Executive Officer, Carlos Brito; and AB InBev Chief Financial Officer, Felipe Dutra. Please remember to review the forward-looking statements at the beginning of the presentation. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to AB InBev CEO, Carlos Brito. Please proceed.

Carlos Alves de Brito

Well, thank you. Good morning and good afternoon, everyone, and thank you for joining Felipe, our CFO, and me on today's call.

On June 29, 2012, we announced our proposed combination with Grupo Modelo, which involved acquiring the 50% stake in Grupo Modelo, which we do not already own. At the same time, we announced that we had agreed to sell Grupo Modelo's 50% interest in Crown to Constellation Brands for $1.85 billion.

Our interest in Grupo Modelo has always been about the opportunity for growth in the Mexican domestic market and in making Corona more global in all markets, excluding the U.S. That's why today, we are pleased to announce the revised agreement between AB InBev and Constellation Brands that includes a complete divestiture of the U.S. business of Grupo Modelo, giving Crown Imports independence of supply and rights in perpetuity to the Modelo brands distributed by Crown in the U.S.

This revised agreement preserves the merits of the Modelo transaction and allows us to move expeditiously through the Modelo integration process, allowing us to capture significant cost synergies.

Under the revised agreement, Crown will have all the responsibilities of a brewery and a state-of-the-art facility to support its growth. Crown would also be granted a perpetual license for the Modelo brands distributed by Crown in the U.S. with exclusive rights to the brands and the freedom to develop brand extensions and innovations for the U.S. market, subject to trademark and quality protections consistent with the global brand manual.

Under the previous agreement, AB InBev had the right, exercisable every 10 years, but not the obligation, to terminate the importer agreement with Crown. That provision has been removed in the revised agreement.

In addition to the perpetual license, the agreement includes the sale of the Piedras Negras brewery to Constellation Brands for a total price of $2.9 billion, subject to a post-closing adjustment. The brewery began operations in 2010 and produces Corona, Corona Lights and Modelo Especial with a current capacity of 10 million hectoliters. Constellation will put in place plans to increase the brewery's capacity to 15 million hectoliters over the course of the next 2 years, which is more than enough to meet expected U.S. demand at that time with the flexibility to further increase capacity to 30 million hectoliters.

The sale of Piedras Negras will ensure independence of brewing and supply for Crown, as well as providing it with complete control of the production in Mexico of Modelo brands distributed by Crown in the U.S. market.

To ensure the smooth transition to Constellation, AB InBev and Constellation Brands will enter into a 3-year transition service agreement. We believe the new agreement keeps intact the strategic rationale of our transaction with Grupo Modelo, while addressing all of the concerns raised by the U.S. Department of Justice in its lawsuit, leaving no doubt about Constellation's ability and incentive to remain an independent competitor in the U.S. market.

Moving to Slide 3. The terms between AB InBev and Grupo Modelo remain unchanged. This means that following resolution of the U.S. DOJ litigation regarding the transaction, Grupo Modelo's operating subsidiary, Diblo, will merge into its parent Grupo Modelo. At the same time, DIFA, the glass company, will merge into Grupo Modelo in exchange for 103 million newly issued Grupo Modelo shares.

As a result of these mergers, AB InBev will own 50.3% of Grupo Modelo's voting shares and economic interest. AB InBev will then launch an all-cash tender offer for all the outstanding Grupo Modelo shares it does not already own at a price of $9.15 a share for the total consideration of $20.1 billion.

AB InBev continues to have full financing in place for the mandatory tender offer. The transaction is subject to U.S. clearance of AB InBev's acquisition of Grupo Modelo. Mexican and U.S. regulatory approval will also be required for the new agreement with Constellation Brands and the sale of the Piedras Negras brewery.

On Slide 4, you'll see an outline of the relationship between the various parties under the initially proposed transaction, as well as the revised transaction. The sale of the Piedras Negras brewery will ensure complete independence of brewing and supply for Crown and will provide it with control of the production in Mexico of Modelo's brands, which are distributed by Crown in the U.S. market.

Slide 5 contains a summary of the 3-year transition service agreement, or TSA, which has been put in place to assist Constellation Brands in the transition of brewery operations. The services available under the TSA are at Constellation's election.

Modelo will undertake the supply at Constellation's election any additional beer required by Crown, which cannot be produced at Piedras Negras brewery or which Constellation does not source from third parties. This beer supply arrangement is valid for a period of 3 years, with prices consistent with Modelo's current cost. Constellation has the option to extend this arrangement for up to an additional two 1-year periods.

Modelo will also supply relevant inputs, for example, bottles, cans and malt, consistent with the current Grupo Modelo cost basis for up to 3 years. On-site management support for Modelo is available for a period of up to 6 months while other ongoing services such as finance, IT and admin services will be provided for up to 3 years under the TSA, if required.

Moving now to Slide 6. Since the announcement of the combination with Grupo Modelo last year, we have been working diligently on our integration planning and reviewing our initial synergy forecasts. As a result of the more thorough analysis we have been able to perform, and reflecting the revised transaction structure, we believe that the annual cost changes, phased-in over 4 years, will be approximately $1 billion, up from the $600 million estimate provided when the transaction was announced in June. The main drivers will be combined purchasing opportunities, sharing of best practices, and efficiencies in overhead and system platform costs.

In addition, the combined company expects to achieve significant revenue synergies through a further expansion of Corona's sales worldwide, excluding the U.S., by utilizing a global distribution network.

Onetime working capital synergies of $500 million delivered over 2 years remain unchanged from the estimate provided in June.

I'd now like to hand it over to Felipe, who will take you through the financials in more detail, starting on Slide 7. Felipe?

Felipe Dutra

Thank you, Brito, and hello, everyone. As a result of the revised agreement, we estimate that the Grupo Modelo business we will be acquiring would have revenues of $6.3 billion and EBITDA of $2 billion on a full 12-month 2013 illustrative basis. We estimate the combined AB InBev and Grupo Modelo business would have revenues of $48 billion and EBITDA of $18.4 billion on the same 2013 basis.

Slide 8 summarizes the funds required for the transaction. The total consideration, including the purchase of the 53.5% interest in DIFA, will be $20.1 billion. The net cash requirement to close the transaction is reduced to $12.9 billion as a result of the proceeds, which we will receive from the disposal of the 50% interest in Crown of $1.85 billion; the proceeds from the disposal of the Piedras Negras brewery and perpetual brand licenses of $2.9 billion; the equity reinvestment in AB InBev by 2 Modelo shareholders of $1.5 billion; the estimated cash balances in Modelo of $1.1 billion minus fees and transaction costs of $200 million, approximately. This net cash requirement will be met from our existing bank facilities.

Now please turn to Slide 9, which outlines our estimate of transaction multiple. Since the terms between AB InBev and Grupo Modelo are unchanged from those announced in June 2012, this multiple analysis has been prepared with the same 2012 EBITDA estimates and estimated Modelo cash balances is at the time of last year's announcement. You will recall that at that time, our analysis estimated a transaction multiple of 12.9x before the sale of the 50% interest in Crown. The transaction enterprise value after the elimination of the 50% interest in Crown, which Modelo does not own; after the disposal of the 50% interest in Crown, which Modelo does own; and after the sale of Piedras Negras brewery and perpetual brand licenses is $25.6 billion.

The associated EBITDA, including cost synergies, is $2.8 billion, which implies an enterprise value to EBITDA multiple of 9.3x. We expect the transaction to be earnings accretive from year 1 and for the transaction's return on invested capital to exceed our cost of capital within 3 years of closing, driven by Modelo's strong organic growth outlook as well as the capture of synergies.

The necessary financing to complete the transaction remains in place. And at the end of 2012, AB InBev had total liquidity between cash and long-term committed facilities of over $35 billion.

I can also reconfirm that our target capital structure remains at 2x net debt to EBITDA, and that after the Modelo transaction, we expect to be below this level during the course of 2014.

With that, I would like to hand back to Brito to make a few comments before we go to the Q&A. Thank you, Brito.

Carlos Alves de Brito

Thank you, Felipe. In closing, I would like to remind you of the compelling strategic rationale for the combination with Grupo Modelo. The combination is a natural next step in the long and successful partnership between 2 historic brewers. We know each other very well, with Modelo importing and distributing Budweiser and Bud Light in Mexico successfully for over 20 years. Mexico is a highly attractive beer market in which to invest based on solid macroeconomic fundamentals and favorable demographics.

The combination also creates significant growth opportunities from combining our 2 brand portfolios and networks. Corona would join Budweiser as a global flagship brand, with the strength of our product portfolios and distribution networks creating meaningful opportunities to grow our brands worldwide.

Furthermore, we would unite Modelo's #1 position in the world's fourth largest profit pool for beer with AB InBev's leading global position.

And finally, we would create synergies from combined purchasing opportunities, sharing of best practices and other efficiencies of $1 billion per annum phased over 4 years.

During the last 7 months, we have had the chance to get to know Modelo business and the people much better. We're very pleased with what we see, and we're excited about the growth we can achieve together.

With that, I'd like now to turn back the call to the operator for Q&A. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Mark Swartzberg - Stifel, Nicolaus.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

The supply agreement, I heard your comments, but I wanted to better understand them. This 3-year transition period where Constellation is buying the beer at a price consistent with Modelo's current cost, is that in -- is that going to be in U.S. dollars or pesos? And how does that current cost compare to what they've been buying beer at?

Carlos Alves de Brito

Felipe?

Felipe Dutra

Well, this is -- this would apply for -- approximately 40% of the foreign debt is not currently produced by Piedras Negras, and that being consistent with the current basis and will be adjusted over time based on inflation. Therefore, the starting point is that they should be buying products at the current base, and if the base is inflated over time, then the inflation will be applied on top. That is the kind of 3 years contract.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And that's -- you said that's in pesos or dollars?

Felipe Dutra

That is U.S. dollars.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

U.S. dollars. And then the 60% continues under the current arrangement?

Felipe Dutra

Well, the 60%, they will be producing in Piedras Negras directly.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Right, okay. So they're going to -- and how does that -- can you comment on how that kind of borne cost from a Crown perspective, how that compares to the current contract?

Felipe Dutra

Well, we -- we'll also be providing help in terms of sourcing of the key supply elements, and therefore they should be incurring in similar cost basis as they have today.

Mark D. Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Similar, okay, great. And if I could real quick, any thought on timing on how -- when the DOJ might come back on this?

Felipe Dutra

Well, it's very hard to speculate on timing, but we believe we're addressing all of their concerns. But we cannot speculate on timing at this stage.

Operator

Your next question comes from the line of Chris Pitcher - Redburn.

Chris Pitcher - Redburn Partners LLP, Research Division

Just following up on the funding for the transaction, you've obviously raised the debt in dollars. And at the time of the Modelo transaction, you mentioned that you were going to keep the cash -- the debt in dollars because the dollar cash flow coming out. And obviously, that the cash dynamics of the acquisition has changed. Will you still be running with dollar debt? Or will you look to hedge some of that into pesos? And then on the remaining footprint, x Piedras Negras, I'm just wondering whether there's any additional CapEx requirements in the Modelo business above and beyond the original transaction promises to compensate for the loss of the brewery.

Carlos Alves de Brito

Felipe will take the first one. I'll take the second one.

Felipe Dutra

Okay. Sorry, the first one was?

Chris Pitcher - Redburn Partners LLP, Research Division

You're going to stick with just dollars debt or you're going to hedge some of the dollars now into pesos?

Felipe Dutra

Okay, I'm sorry. Okay. I was paying attention on the second question. The U.S. dollars debt is going to be the primary source at this stage. And we're going to evaluate over time whether or not to keep it in dollars or to reshuffle a bit across other currencies. But for now, we are keeping it in dollars.

Carlos Alves de Brito

And, Chris, on the second question on Modelo CapEx, I mean, there'll be no need for us to, on the Modelo side, do any adjustment because you have to remember that Piedras Negras is totally dedicated to the U.S. exports. So as we sell that capacity, that doesn't affect, really, the domestic Mexican production or exports to the rest of the world.

Operator

Your next question comes from the line of Anthony Bucalo - Santander.

Anthony J. Bucalo - Grupo Santander, Research Division

A quick question related to Chris's question. When you start exporting Modelo out of Mexico into the sort of the broader international markets, do you have the capacity to do that now in the system if you get a sort of big ramp-up in Modelo volumes? And the second question is did you, at any point, consider maybe shedding one of sort of legacy Bud brands to lose a little bit of market share in exchange for being able to keep this brewery?

Carlos Alves de Brito

First, I mean, in terms of export, we don't see any issues. And then it's business as usual for us in terms of Mexico domestic production and exports for the rest of the world. Again, Piedras Negras is being sold, that was solely dedicated to the U.S. business so that won't impact anything that Modelo had planned. Of course, they have planned for increased sales domestically and outside, but that was already in their CapEx planning. So that won't affect anything. And in terms of your second question, I'm not going to speculate on that. So today, we're focused on the deal, that was the revised deal that, as Felipe said, we believe addresses all the points from the DOJ complaint and lawsuit.

Operator

Your next question comes from the line of Nik Oliver - Merrill Lynch.

Nik Oliver - BofA Merrill Lynch, Research Division

Just one follow-up to Chris's question on the financing. I'm not sure if you answered it. And I think before you guided to a 2% cost of finance and highlighted the U.S. dollar hedges as one of the reasons for that low cost, should we still work off a 2% cost in our accretion modeling? And secondly on synergies, clearly a higher number, and can you just confirm that's purely cost synergies and not factoring in any revenue synergies, and perhaps some help on the phasing as well?

Carlos Alves de Brito

Yes, well, first of all, the cost of borrowing for this transaction is approximately 2%. It remains like that in U.S. dollars. Synergies, we expect about 40% to 45% to be captured at a cost of goods sold line and the balance, meaning 55% to 60%, on SG&A. And those will be captured over the next 3 to 4 years.

Operator

Your next question comes from the line of Trevor Stirling - Sanford Bernstein.

Trevor Stirling - Sanford C. Bernstein & Co., LLC., Research Division

Quick question, there's about 4 million hectoliters, if I'm right, that is currently brewed for export in breweries other than Piedras Negras. As Piedras Negras ramps up, presumably that will leave a little bit of a hole in your capacity, but presuming that will be filled by growth in domestic volumes and export elsewhere?

Carlos Alves de Brito

That's correct.

Operator

And your next question will come from the line of Ian Singleton -- I'm sorry, Ian Shackleton - Nomura.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Two questions, Felipe and Brito. When we talk about the synergies going to $1 billion, is that taking account of any dis-synergies that might arise as the 3-year transition service runs out? The first question. And the second question is really around Constellation. Are they able to sell Modelo products in any of the markets other than the U.S.? Could they sell in Mexico or into other international markets?

Carlos Alves de Brito

Well, the synergy number in -- is $1 billion net of any dis-synergies. So the synergy number reflects this new revised deal with Constellation, okay? So it's net, $1 billion, and that's only cost synergies. And the second question, was that if they have ability to sell Grupo Modelo brands outside of the U.S.?

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

Correct, yes.

Carlos Alves de Brito

Yes, the answer is no. They can -- they have the perpetual license to the Grupo Modelo brands that they currently sell in the U.S. market alone with -- along with line extensions and other innovations connected to those brands.

Ian Shackleton - Nomura Securities Co. Ltd., Research Division

But presumably they could brew another brand in Mexico, not a current Modelo brand, and export that to the markets. They could do that with other brands?

Carlos Alves de Brito

On principle, yes, but I think you should -- that's a question that they should deal with.

Operator

Your next question will come from the line of Andrew Holland - SG.

Andrew Holland - Societe Generale Cross Asset Research

Just to -- could you just give us the revised depreciation and amortization charge that goes with the $2 billion EBITDA? So what is the EBIT? And secondly, you've magic-ed up $400 million of additional synergies over the last 7 months of work. I'm sure we all wish we could do the same. Could you give us some concrete examples of where those extra cost savings have been found, please?

Carlos Alves de Brito

Well, I think on the D&A question, Andrew, Graham can follow up with you after this call. On the extra synergies, I mean, quite simply, I mean, the same thing happened with AB. I think when you announce a deal, you have very limited information. You have only have public information and benchmarks and all that. So in our experience, having done this so many times, and that's where the $600 million was based. The $1 billion is based now on 6 to 7 months of working together with the selected group of people from both companies that we're working in the integration planning. And as you do that and do the bottoms-up analysis, you, like we did with AB InBev deal, we came up with other opportunities that we couldn't see when we're looking at very consolidated figures at the beginning in June. So that's how we -- how you bridge the $600 million to $1 billion.

Andrew Holland - Societe Generale Cross Asset Research

Okay. So for example, you would have taken a view on how much Modelo might be paying for its cans, how much you might be able to save on that, and then you discover you can save more than that. Is that an example of sort of...

Carlos Alves de Brito

Yes, I guess, the best way, Andrew, to understand this is that, again, the same happened with the AB InBev transaction in 2008. Once you announce the transaction, you have the view of the public company-type numbers and they tend to be very consolidated. And because you have experience and you're in the same business, you make assumptions, and you get to the $600 million number. After you worked together with them under the guidelines of integration planning process, you can do, not a top-down exercise, but this time a bottoms-up exercise and be much more detailed and get to know the numbers much better, and then you come up with figures. And as with the AB transaction, this time around again, we were able to see stuff that we couldn't see before, and the number went up from $600 million to $1 billion. If you remember, the AB case, it went up for $1.5 billion to $2.25 billion given the same process.

Operator

And your next question will come from the line of Alice Longley, Buckingham Research.

Alice Beebe Longley - The Buckingham Research Group Incorporated

I gather you are going to be getting licensing fees from Constellation. Could you tell us what that rate is and will they show up -- do they show up in SG&A or cost of goods sold? And also what happens to Modelo gross margins now that you're not shipping product to Constellation? Do the gross margins go up, down or whatever?

Carlos Alves de Brito

Felipe?

Felipe Dutra

Well, the first question regarding licensing. As part of the purchase price of $2.9 billion, they are not only paying for the assets but paying for the expected net present value of the earnings those assets will be generated. Therefore, no future payment is expected other than potential price adjustment post closing. I think that was the first question. The second question on Modelo's margins, I don't have that number in front of me. So we will have to follow up on the later stage. However, the amount of synergies to be captured should significantly drive margin expansion up of the Modelo business over time. So that is where we are focused on.

Operator

Your next question will come from the line of Kris Kippers, Petercam.

Kris Kippers - Petercam S.A., Research Division

Just a small question on the international part of Modelo now. Are you already working on the international licenses Modelo has with other players in the market in order to speed up distribution via your own network?

Carlos Alves de Brito

No, Chris, no. Not yet. I mean, under the integration planning process guidelines, that's one thing that was not on the table. I mean, that has to do with commercial arrangements and that's off the table. So that will only happen once this transaction is cleared and closed.

Operator

Your next question will come from the line of Lauren Torres - HSBC.

Lauren Torres - HSBC, Research Division

Brito, I was hoping you could just shed a bit of light on coming to this decision of divesting the U.S. business. It appeared that when the DOJ filed the lawsuit, InBev's comment was that their claims were inconsistent with the law and that you'd refute those claims. So I'm just curious if there's any light you could shed on the fact that this was a business that you'd like to hold onto and that you may have refuted those claims rather than make the announcement today. Why did you push this fast -- or forward so fast maybe rather than kind of refuting those claims?

Carlos Alves de Brito

Well, Lauren, while we were confident for sure in our legal case in the transaction we presented or proposed in June, we decided to restructure the transaction to address all of the concerns raised by the DOJ and its lawsuit of January 31. I can tell you we were very pleased to have reached this revised agreement that preserves the merits of the Modelo transaction, which is about growth in Mexico and outside of the U.S. with the Corona global brand. So that rationale remains intact and while fully divesting the Modelo's U.S. business in the U.S. So I think we decided to change it, to address the DOJ concerns. These changes don't change at all the core objectives of the Modelo transaction we announced in June, which is about exciting Mexican market and exciting global Corona brand and its prospects for growth. I mean, if you look at what happened with Budweiser in the last 4 years on a global scale, that's what you see. Whenever you got a great brand to connect with a very established and wide footprint, things can happen and brands grow. And I think that's what we're excited about. And we can't wait to get started. So that's the context for the revised transaction.

Operator

This concludes the question-and-answer session for today's conference call. I would now like to turn the call back to Carlos de Brito for any closing remarks.

Carlos Alves de Brito

Well, thank you very much, everybody, for your time in a short notice. And we'll reconnect with you on February 27 for full year 2012 numbers announcements. Thank you very much, see you then. Bye, have a nice day.

Operator

And thank you, again, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect, and have a great day.

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