The largest brewer in the world, Anheuser-Busch InBev (BUD), announced on June 29 that it agreed to purchase the remaining 50% of Grupo Modelo for a whopping $20.1 billion. BUD said it would pay $9.15 for each share of Grupo Modelo, a 30% premium to Grupo Modelo's closing share price on June 22. BUD indicated that it took on another $14 billion of debt to fund the all cash transaction, and gives the deal a greater exposure to the steadily growing Mexican beer market, which has been averaging approximately 3% growth per year. Additionally, management indicated the deal could save up to $600 million per year. Two Modelo board members had committed to invest $1.5 billion of their proceeds in AB InBev shares to be delivered within five years. The two would also join AB InBev's board.
This is the latest step in the consolidation craze that is ripping through the brewing industry. Almost four years ago (July 12, 2008) Anheuser-Busch was purchased by Belgian brewer InBev, and began a wave of mergers and acquisitions in the brewing industry. SABMiller had been the largest brewer prior to the Anheuser-Busch/InBev combination. Total volumes increased 1.8% during the first quarter, and the expectation is for a strong second quarter, especially in Europe, due to Budweiser's co-sponsorship of the UEFA European Soccer Championship. During the first quarter, global Budweiser volumes jumped 7.3% thanks to growing sales in China, Canada, Russia, and the U.K.
As part of the deal, Constellation Brands (STZ), purchased the remaining 50% of a joint venture it had with Modelo to import and distribute beers, including Corona in the United States. The move was designed to prevent the Department of Justice from bringing up antitrust issues As a result of the combination, BUD would then have a higher market share than 50% and that would definitely attract the DOJ's interest.
During the first quarter of 2012, BUD incurred almost $660 million of finance charges, and now with another $14 billion of debt on the balance sheet that cost is only going to increase. It is a hefty price to pay for Modelo, but I think it is will be well worth it. Volumes in the United States grew by 1.3% during the first quarter, due in part to the launch of Bud Light Platinum. The ownership of Corona, one of the highest volume imports in the United States, will only help to strengthen BUD's position in the US market. More importantly, it adds other premium beers to BUD's lineup, which will help improve the Company's margins.
It was a heavy price to pay, but there have been rumors about this deal going all the way back to 2009. However, as an investor, is BUD now an attractive buying opportunity, or is it too pricey? The Company has beaten the Street's expectations in three of the past four quarters, with June 2011 quarter missing by a penny. Estimates for the current quarter have been steady at $1.11 for the past three months despite the weakness in Europe. The stock broke through resistance at $75.00 on the back of the merger news, its forward PE ratio is just 14, compared to the industry average of over 22, while BUD's trailing twelve month PE ratio is over 18 (below the industry average of 27). The stock is trading with a PEG ratio of just 1.27, while a competitor the Boston Beer Company (SAM) trades with a PEG ratio of 2.52. The lower the PEG ratio, the more undervalued the stock is. SAM has been my favorite in the brewing industry for a long time, but following today's announcement, and the lofty valuations of SAM, I think BUD looks like a better investment at this level. I still like shares of SAM, but feel there is more upside potential over the next 12 months in shares of BUD.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.