On Monday, Constellation Brands (NYSE: STZ) announced its plan to submit a proposal to the US Department of Justice to acquire a brewery operation currently part of Grupo Modelo. This is a subsidiary, of course, of Anheuser-Busch InBev SA/NV. The deal is reported to be valued at roughly $600 million.
The Grupo Modelo brewery is located in Obregon, Mexico, is estimated to have a rough production capacity of four million hectoliters—with only minimal investment and optimization—after closing. This transaction, of course, will be subject to customary closing adjustments and approvals from both US Department of Justice and Mexican regulatory boards.
This acquisition will now allow Constellation to obtain that brewing capacity immediately, which will help to better support the company’s growing high-end Mexican beer portfolio and, more so, to provide them with more flexibility to invest in more innovative strategies in the future. In addition, Constellation says it will also be able to now become entirely independent from its interim supply agreement with Grupo Modelo. As a result of this, then, Constellation will now be able to begin to phase the buildout of at least 10 million hectoliters, at Mexicali, with at least the first half of this expected to transfer and be operational by December of 2019. Of course, further capacity will be planned in line with growth as things continue.
“We believe this is the right strategy to provide near-term capacity and greater flexibility to support our growth and innovation plans, while allowing for the buildout of our Mexicali brewery over an extended time period,” explains Constellation Brands president and Chief Executive Officer Rob Sands. He continues, “We look forward to welcoming Obregon`s talented employees to our Constellation family and working together to continue to capture the ongoing growth opportunities we see in the high-end segment of the U.S. beer market.”
In addition, Constellation Brands executive vice president and chief financial officer David Klein reports, “The magnitude of our long-term investments in Mexico largely remain the same. The revisions to our operating plans essentially represent an initial shift in spend to Obregon from Mexicali. This will result in an increase in our free cash flow estimate for fiscal 2017 to a range of $575 – $675 million. As originally outlined, Mexicali is scalable to 20 million hectoliters to support the future growth of our beer business, which continues to significantly outperform the U.S. beer market.”