Why We Think An Anheuser-Busch InBev Tie Up With Grupo Modelo Makes Sense

| About: Anheuser-Busch Inbev (BUD)

Over the weekend, news hit the wire that large-cap brewer Anheuser-Busch InBev (NYSE:BUD) may finally be acquiring the rest of Mexican brewer Grupo Modelo (OTC:GPMCY).

<< View Press Release Confirming Talks

Grupo Modelo is best known for its Corona brand of beers, which is the best-selling imported beer in the United States, and Mexico's top export product. According to a story from Bloomberg, sources think ABI could pay as much as $20 billion for the share of Grupo Modelo it doesn't already own (others note $12 billion may be a more accurate number). In either case, Anheuser-Busch InBev has a considerable amount of cash on hand, but we think the firm will have to take on some new debt to complete the acquisition. Since the deal has not been formally announced, our fair value estimate of ABI remains unchanged as we anxiously await further information regarding deal terms.

Overall, we think this proposed transaction is a positive for ABI. As the US experiences slightly declining beer volumes and the big corporate players face intense competition from regional brewers, we think adding Corona to the company's brand portfolio is a positive move. This move further solidifies ABI's stronghold on the world's insatiable thirst for beer. Corona, Budweiser, Stella Artois and Beck's--all within the ABI portfolio--are among the most popular beer brands in the world, and all of the beers have a global footprint.

Further, we think ABI will be able to identify cost savings and positive supply-chain initiatives, as the company is skilled at integrating huge acquisitions. In 2008 InBev merged with Anheuser-Busch and has successfully cut costs to increase profitability. We think ABI will be able to successfully integrate Grupo Modelo in similar fashion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.