Anheuser-Busch InBev NV (ADR) (NYSE:BUD) and SABMiller plc (LON:SAB) are the two-biggest beer companies in the United States. But a company that doesn’t currently sell beer will soon be the third-largest beer company in America.
Beer consumption in the US, after being hammered by the recession, is beginning to grow again. Fourth-quarter shipments rose 1.5% compared to the previous year.
Anheuser-Busch InBev NV (ADR) (NYSE:BUD) saw its profits decline in the fourth quarter by 5.1% even though revenue rose 4.2%, though full-year profits did rise 24%. SABMiller plc (LON:SAB) also saw its fourth-quarter revenue rise by about 4%, though this was down from 10% growth in the previous year.
The secret investment
Anheuser-Busch InBev NV (ADR) (NYSE:BUD) is currently finalizing a deal to acquire Grupo Modelo, the leading Mexican brewer, for $20 billion. This deal was stalled by the federal government over antitrust allegations, but a compromise has finally been reached and InBev will be able to proceed with its purchase.
This purchase will give InBev fantastic growth potential in Mexico, which is one of the largest and fastest-growing beer markets in the world.
However, the real growth potential is with a little known company called Constellation Brands, Inc. (NYSE:STZ). Constellation sells wine and liquor such as Svedka vodka.
The deal that Anheuser-Busch InBev NV (ADR) (NYSE:BUD) worked out to avoid antitrust proceedings entails selling Constellation Brands, Inc. (NYSE:STZ) the rights to Corona in the US, as well as four other beers owned by Grupo Modelo.
In addition, Anheuser-Busch InBev has agreed to sell Constellation a large, state-of-the-art Mexican brewery. This addition was not part of the original deal, but was later added to give Constellation the ability to produce and expand production of these beer brands.
Anheuser-Busch InBev NV (ADR) (NYSE:BUD) is selling all this to Constellation for $4.7 billion. For the sake of pleasing the federal government and its desire for strong competition in the beer market, Constellation has agreed to expand the brewing facility in Mexico to increase output.
Constellation Brands, Inc. (NYSE:STZ) is understandably thrilled with the deal. As the deal grew in scope from originally just the beer brands to also include the brewing facility, Constellation liked the deal more and more. Its CEO Rob Sands was quoted as saying: ”We like it more than the earlier deal because we’re buying a much larger profit stream. The more, the better.”
The deal should be finalized in June, and will almost instantly double Constellation’s profits and revenue, propelling the company into the number-three spot in the US beer market in terms of volume. Constellation will have the rights to Corona, the number-one imported beer, and Modelo Especial, the number-three imported beer.
Such incredible growth prospects caused the stock price to jump when investors received the first inkling of a deal back in mid February. The stock shot up 37% in one day to about $44. The stock currently trades at about $48 and has a one-year target of $56.
Sales at Constellation Brands, Inc. (NYSE:STZ) have declined for four years in a row, so this deal with Anheuser-Busch InBev NV (ADR) (NYSE:BUD) is exactly what the company needs. Net income grew by a whopping 463% in 2011 but declined by 20% in 2012.
The $4.7 billion price tag that Constellation will pay is only an estimated 9 times the operating profit of the assets. Financing has already been lined up.
Final Foolish thoughts
SABMiller plc (LON:SAB) is the one most negatively affected by this deal. It gains nothing through the deal and is now faced with one more major competitor. Unless SABMiller plc (LON:SAB) can really stir up consumer interest, this deal will result in SABMiller plc (LON:SAB) losing market share in the Americas, since its two main competitors have major expansions in the works.
Anheuser-Busch InBev NV (ADR) (NYSE:BUD) In Bev will benefit from this deal by being able to increase revenue in Mexico and Latin America. This is a high-growth market so look for this acquisition to pay off.
Constellation Brands, Inc. (NYSE:STZ) will gain the most from this deal. However, one thing to be aware of with Constellation is that shares aren’t heavily traded. Its average three-month volume is 4.8 million shares, and that number is a little distorted because of wild trading on a few days when news of this deal was released. So its stock could be very volatile.
Constellation is set to double profits and revenue this year, launching it into the number-three position among beer companies in the US. Even though the stock shot up after the deal was revealed, there is still plenty of room to grow. Look for both the finalization of the deal in June and future earnings reports to boost the stock.
The article The Secret Company You Should Be Buying originally appeared on Fool.com and is written by Sean Sullivan.
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