Apr 13 2010
Economy of scale is its own reward, so expect more of these deals toward the capitalistic asymptote of monopoly. More than 50% of the market is now owned by four companies, and the CEO of Heineken in his press release said he expected another 25% to coagulate shortly.
The philosophical question asks when laissez-faire starts working against the consumer, because ideally it should be right before that point whether the governments step in to limit the impending monopoly. Heineken’s acquisition of Femsa doesn’t really consolidate power in Mexico any more than it already stands, and that deal doesn’t have much potential to affect the world market. And we can thus expect two things: 1) more mergers are in the works, and 2) the odds of a regulator levying constraints on a merger increase with each deal, so potential mergers will continue to be expedited until the risk ignites.
Besides decreasing takeover candidates and increasing risk of government intervention, another factor currently limiting beverage-related M&A includes: most beverage companies are family businesses who may be hesitant to sell outside the family (including Modelo). Sam Adams has a similar (but non-family) attitude, having a corporate culture that simply doesn’t want to be bought out by a conglomerate, and management supportive of that paradigm.
Analysis: So, bottom-line, should InBev/Anheuser-Busch buy Modelo? InBev already owns 50% of them, which includes a 43% right over votes. This, first and foremost, is evidence that the company is still family-run. The fact that 50% is such a round number implies that InBev (rather, Anheuser-Busch before them) bought as much as they were allowed—they hit a ceiling; the fact that the owners (the family) put a ceiling on non-family ownership implies that they’re not ready to sell. If Modelo sold to any conglomerate, the purchaser would surely have to overpay according to the whim of the Fernandez family.
Modelo is a strong company. Its gross profit margins have consistently remained over 50% for the last five years, and net profit margins have been over 20% for the same time. While they would love to have the economy of scale and connections that would allow them worldwide growth, they have no obvious incentive to sell.
The other question must be whether or why InBev would want to buy Modelo at this point. Modelo is both solid and controlled by InBev. Modelo can’t break up with InBev, since InBev are owners. They could choose not to enter into various deals that would be beneficial to InBev, but could they do that on a scale that justifies the billions of dollars necessary for the acquisition? Are the Fernandezes holding InBev’s plans for Modelo back somehow? Will owning that other 8% of voting rights provide a sufficient economy of scale within Mexico or abroad to cancel out those billions?
One thing Modelo has a comparative competency in against InBev is Modelo’s distribution channels in Mexico. InBev could cut manufacturing and distribution costs within Mexico sufficient to justify the purchase. If Heineken or anyone else bought Modelo, it would shackle InBev in Mexico.
The wine industry is largely defined by the lack of brand-loyalty of its customers. The beer industry does not have this problem. If someone other than InBev bought Modelo, customers would still find a way to get their Budweiser; but without Modelo’s distribution channels, it would be more expensive. And since prices are set at this stage primarily by the marketing department, those increased costs would be absorbed by InBev. Because InBev has the cookie, they would insist on their distributors absorbing the costs, and that would start a morale issue.
I still question whether InBev can find higher margins in other, ancillary drinks such as soft drinks just as easily. According to a government website, over a twenty year period “per capita consumption increased… 61 percent for carbonated soft drinks, 42 percent for fruit juices, and 11 percent for wine. During the same period, per capita consumption declined 40 percent for distilled spirits, 4 percent for coffee, 2 percent for beer, and 1 percent for tea.” Americans now average 53 gallons of soda consumed per capita compared to 22 gallons of beer. The distribution channels are established and already owned by InBev.
It all comes down to the Fernandez family. The demand is there, and they could sell it at a good price whenever they’re ready; but there’s no reason to believe they’re getting ready. I am serious when I say that probably the most efficient expenditure of money on InBev’s part would be to hire someone to convince various members of the Fernandez family that they don’t want to grow up to be beer barons (that drinking is a sin, that their family is what’s keeping Mexico down, that alcohol is why their father left them, etc.) Again, I mean that recommendation very literally. Because it’s either that or buy off the Fernandezes.
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