This article first appeared in the St. Louis Beacon: June 16, 2008 - The merger business has gotten so complex that it may be tougher to buy half a company than to sell a whole company.
That's the dilemma facing Anheuser-Busch as it contemplates a $65-a-share takeover bid from Belgian beer giant InBev.
Aside from Anheuser-Busch deciding if InBev's price is right, the wild card in this drama may be Grupo Modelo, maker of the Corona brand and Mexico's leading brewer.
Anheuser-Busch owns 50.2 percent of Grupo Modelo, and some analysts suggest Anheuser-Busch may try to acquire its partner -- if Grupo Modelo is interested. "It's very unclear if they want to sell," says Benj Steinman, editor of Beer Marketer's Insights, a publisher of beer-industry research and newsletters. "It's a very fluid situation."
If Anheuser-Busch bought Grupo Modelo, that would raise the takeover price for InBev. A buyout could add $10 billion to $15 billion to InBev's initial bid of $46.4 billion, according to some Wall Street estimates.
If InBev were still interested, it would have to take on more debt to finance the deal. It already plans to borrow at least $40 billion, and it doesn't want to pay more.
On Sunday, it told Anheuser-Busch that its offer covers only "current assets, business and capital structure." Alarmed by press reports of talks between Anheuser-Busch and Grupo Modelo, InBev warned of "potential adverse consequences any such transaction could have on the ability of your shareholders to receive our premium offer."
However, there's no indication that Grupo Modelo, which is controlled by family interests, wants to sacrifice its independence. If U.S. politicians are so inflamed over InBev buying Anheuser-Busch, how would Mexicans react to Americans acquiring a company founded in 1925?
"Our goal is to continue to be a Mexican company that brews high quality beer in Mexico for markets all over the world," a Grupo Modelo spokeswoman said Friday in a prepared statement.
DEAL OR NO DEAL
Even though it has nine representatives on Grupo Modelo's 19-member board of directors, Anheuser-Busch lacks any operational control. In addition, the agreement between the companies has an air of mystery about it.
Some analysts say their contract contains a change-of-control provision. If another company buys Anheuser-Busch, family interests controlling Grupo Modelo can buy back the St. Louis company's investment. Other analysts doubt an exit clause exists.
"We can find no change-of-control protection for Grupo Modelo in any public documents," says a recent report by Credit Suisse. If InBev buys all of Anheuser-Busch, it will get half of Grupo Modelo, the firm says.
However, Merrill Lynch says the agreement and Grupo Modelo's bylaws "prohibit the transfer or sale of a stake to a competitor." Grupo Modelo's controlling shareholders have the first right to buy Anheuser-Busch's stake if the St. Louis company is acquired, the firm says.
Anheuser-Busch bought 17.7 percent of the Mexican brewer in 1993 and, a few years later, increased its ownership.
The 1993 agreement "does not clearly lay out the rights of the two parties upon a change in control," says a recent report by Morgan Stanley. "However, Modelo believes it has the right to buy out Anheuser-Busch's stake if another brewer buys Anheuser-Busch, and we have no basis to challenge that view."
Morgan Stanley says there is "uncertainty" about a buyback price. "The basis would likely be 'good faith' negotiations, since this was (the) basis in the (1993) document under a number of situations outlined," Morgan Stanley adds.
The firm says it believes Grupo Modelo prefers independence to being swept up by InBev's takeover of Anheuser-Busch.
However, it isn't clear if the companies have negotiated amendments to the original agreement, or if they are discussing changes now. On Friday, the Wall Street Journal, citing unnamed sources, said the companies were holding preliminary discussions for unspecified reasons.
"Grupo Modelo will follow closely the development of the negotiations between Anheuser-Busch and InBev," the Mexican brewer said Friday, declining to provide details of its agreement.
"If the two brewers were to reach an agreement, Grupo Modelo will make the necessary decisions in benefit of the company and its shareholders, based on the conditions of the contract that rules over our relationship with A-B," Grupo Modelo said.
THE NEXT MOVE
Given its acquisitive nature, InBev would covet half -- or all -- of Grupo Modelo because InBev isn't in Mexico and Grupo Modelo now has 56 percent of the Mexican market.
Based on 2006 beer-volume data, Merrill Lynch says InBev has a strong South American presence, including a 69 percent market share in Brazil, 76 percent share in Argentina, 15 percent share in Venezuela and 12 percent share in Chile.
Grupo Modelo also has a management structure that would make InBev's cost-cutters salivate. "We believe that InBev would like to get the upside of turning around Modelo before A-B has its turn," says a Credit Suisse report issued before InBev bid for Anheuser-Busch.
"We have long argued that Modelo is glacially slow and inefficient when benchmarked against global peers," the investment banking firm says. Grupo Modelo "seems to have a great deal of opportunity for improvement" in many areas ranging from pricing to packaging to costs.
It would make sense for Anheuser-Busch to buy the rest of Grupo Modelo even if the deal initially dilutes the value of the St. Louis company's stock, Credit Suisse says. The offer might require granting "exceptional benefits" to the controlling shareholders of Grupo Modelo to speed up Anheuser-Busch's assumption of management control.
However, here's where a buyout scenario becomes complicated. A diagram of the Grupo Modelo ownership structure and Anheuser-Busch's investment looks like a St. Louis Cardinals lineup card after Tony La Russa has used every pitcher and every position player.
There are three classes of stock, but the class held by the public is non-voting, says a recent analysis by Morgan Stanley. Shares are traded on the Mexican stock exchange.
Grupo Modelo is a holding company which owns just over three-fourths of Diblo, the company that runs the beer business. Modelo's controlling families hold 45 percent of Grupo Modelo's shares, but they have 56 percent of the voting power.
Anheuser-Busch owns 35.1 percent of Modelo's stock, and it has 44 percent of the voting power. It also owns 23.3 percent of Diblo. As a result, Anheuser-Busch owns 50.2 percent of the Mexican beer business.
"The sticking point," says Credit Suisse, is that the Modelo families' voting trust at the board of directors "is controlled by a 90-year old patriarch whose company has created a tremendous amount of value over the years."
If Antonino Fernandez Rodriguez, who now holds the title of honorary life chairman, opposes a sale, then there won't be a sale. His nephew, Carlos Fernandez Gonzalez, is chairman and CEO of Grupo Modelo and a member of the Anheuser-Busch board.
"With succession of the voting trust in question, we believe that the day will come when A-B will be in a position to bid for control of Grupo Modelo," Credit Suisse says.
Robert W. Steyer, a freelance journalist living in New York, was a business writer for the St. Louis Post-Dispatch.