Constellation Brands (STZ) to Acquire Brewery Operation from Grupo Modelo in $600M Deal

October 31, 2016 9:10 AM EDT

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Constellation Brands (NYSE: STZ) announced that it will submit to the U.S. Department of Justice a proposal to acquire a brewery operation from Grupo Modelo, a subsidiary of Anheuser-Busch InBev SA/NV for $600 million. The brewery, located in Obregon, Mexico, is expected to have four million hectoliters of production capacity with minimal investment and optimization by Constellation after closing. This transaction is subject to customary closing adjustments and U.S. Department of Justice and Mexican regulatory approvals. The acquisition of the Obregon brewery allows Constellation to immediately obtain functioning brewery capacity to support its fast-growing, high-end Mexican beer portfolio and provides flexibility for future innovation initiatives. It also enables the company to become fully independent from the interim supply agreement with Grupo Modelo. As a result, Constellation will phase the buildout of 10 million hectoliters at Mexicali, with the first 5 million hectoliters of production capacity expected to become operational by December 2019, and subsequent capacity planned to align with future growth.

"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," said Rob Sands, president and chief executive officer, Constellation Brands. "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."

The Obregon brewery is located on Mexico`s west coast in the state of Sonora, and will help service Constellation`s largest beer markets in the western U.S. The majority of Obregon`s production is currently satisfying the interim supply agreement today, so it is expected to be a smooth transition during the continued expansion of the Nava brewery and the buildout of the Mexicali brewery.

"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," said David Klein, executive vice president and chief financial officer, Constellation Brands. "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."

With the Obregon acquisition and phased buildout of the Mexicali brewery, the company is now targeting the following, which includes the previously announced glass plant expansions:

Mexico Beer Expansion Capital Expenditures (1)
(in millions)
FY 2014 - 2015FY 2016FY 2017FY 2018 - 2021Total (2)
Nava Projects (3)$725$650$550 - $600$525 - $575$2,500
Mexicali Brewery Build (4) $125$225 - $275$1,000 - $1,050$1,400
Total$725$775$775 - $875$1,525 - $1,625$3,900

(1) Some rounding for presentation purposes.

(2) Based on implied midpoint for all ranges.

(3) Includes expansion of the Nava brewery to 27.5M HL of production capacity; and glass plant warehouse, rail and furnace expansion. Expected to be completed by early calendar 2018.

(4) Includes 5M HL of production capacity and land, water rights, infrastructure and other site requirements to accommodate scalability to 20M HL of production capacity. Expected to be completed by end of calendar 2019.

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