Good day, ladies and gentlemen, and welcome to the Anheuser-Busch InBev and Grupo Modelo investor conference call. My name is Erica and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call, Mr. Carlos Brito. Please proceed.
Thank you, Erica. Good morning, good afternoon, everyone, and thank you for joining us today. We're very pleased to be able to talk to you this morning about our agreement with Grupo Modelo to combine our two businesses. This is a natural next step in our relationship and an evolution of a successful long-term partnership between the two companies that dates back more than 20 years. I'm joined on the call by Felipe Dutra, our CFO. In a moment, we'll walk you through the strategic and financial rationale for the transaction. Before doing so, I have the pleasure of welcoming Carlos Fernandez, Chairman and CEO of Grupo Modelo, who's joining the call from Mexico City. As many of you know, Carlos has led Grupo Modelo for 15 years and has played a leading role in growing the company into the successful business it is today.
He has transformed the company into a globally recognized leader in beer, known for its high-quality products and proud Mexican heritage. So I'd like to start by inviting Carlos to say a few words. Carlos?
Thank you, Brito, for your kind introduction. I'm pleased to be here today to share the news that Grupo Modelo and Anheuser-Busch InBev have agreed to combine, bringing together two companies with a long, successful history together. I have personally collaborated closely with Anheuser-Busch over the past years and actually the last four years with Carlos Brito and his team. The two companies have a strong relationship, and I believe the success we have achieved-
God, this is like being in a western.
Hello?
Yes.
Yeah.
Go on.
The two companies have a strong relationship, and as I was saying, and I believe the success we have achieved together speaks for itself, particularly demonstrated by the growth and continued popularity of Bud Light in Mexico. We have grown Bud Light into the number one imported beer in our country, in Mexico. I started the company, as you may know, at a young age. Back then, and even when I became CEO decades later, I never imagined that the company would grow to the size it is today. I am very pleased
Okay
with what our people have been able to accomplish, and extremely proud of the high-quality products that our world-class breweries produce. This is a momentous transaction for Grupo Modelo, and I truly believe also for Mexico. It will further propel us onto the world stage, providing additional growth opportunities for our brands and allow more consumers to enjoy a part of Mexican taste and heritage. I'm also excited for Grupo Modelo to become part of the largest brewing company in the world and one of the world's top consumer goods companies. I know Brito joins me in my enthusiasm for this transaction. Now I'd like to turn the call back to him to begin the presentation. Thank you very much. Thank you again, Carlos.
Thank you very much, Carlos. Let's go to our deck now to our presentation. On slide two, you'll see our agenda for today. We'll start with the transaction highlights, followed by a look at the attractiveness of the Mexican market and Modelo's leadership in Mexican beer. We'll explain why we believe this is a compelling combination, followed by the financials, our track record, and next steps before moving to Q&A. Let me start with slide four and a few points on the strategic rationale for this transaction. There are a number of reasons why we're excited about this agreement. First, it's a natural next step in a long and successful partnership between two historic brewers. We know each other very well, with Modelo importing and distributing Budweiser and Bud Light in Mexico successfully for over 20 years.
As you know, AB InBev is already the largest shareholder in Modelo, with an economic interest of over 50%, resulting from a series of investments which began initially in 1993. As such, this transaction cements our relationship after a long history of working together. Secondly, we believe Mexico is a highly attractive beer market in which to invest based on solid macroeconomic fundamentals and favorable demographics. The transaction would also create significant growth opportunities from combining two leading brand portfolios and networks. Corona would join Budweiser as a global flagship brand with the strength of our product portfolios and distribution networks, creating meaningful opportunities to grow our brands worldwide. We would unite Modelo's number one position in the world's fourth-largest profit pool with AB InBev global's leadership position.
Finally, we would create synergies from combined purchasing opportunities and sharing of best practices of at least $600 million per annum, phased over four years. Moving now to slide five. I'm not going to spend a lot of time on the mechanics of the transaction, but I'd like to highlight the main steps. Both Diblo, the main Modelo operating entity, and DIFA, a partly owned glass bottle manufacturer, would merge into Modelo. Following those mergers, AB InBev would own just over 50% of Modelo's voting shares and economic interest. We would launch an all-cash tender offer of $9.15 per share for all outstanding Modelo shares, resulting in a total consideration of $20.1 billion. Fully committed finance is in place for the transaction. Separately, Modelo will sell its 50% interest in Crown to Constellation Brands for $1.85 billion, resulting in Constellation owning 100% of Crown.
Turning to the financials on slide six, the tender price represents a premium of approximately 30% to Modelo's closing stock price of 97.95 pesos on June 22nd, 2012. Including the estimated value of AB InBev's existing stakes in Modelo and Diblo, the transaction enterprise value would be $32.2 billion, which implies an enterprise value to EBITDA multiple of 12.9 times. This is before the disposal of Modelo's 50% interest in Crown and before synergies. After both Crown disposal and inclusion of synergies, the multiple reduces to 10.8 times. We expect the transaction to be earning accretive as from year one. We also expect the transaction's return on invested capital to exceed our cost of capital within three years of closing, driven by Modelo's strong organic growth outlook, as well as the capture of synergies.
Incremental debt is very manageable given our strong cash flow generation. We expect to be below our target capital structure of two times net debt to EBITDA during the course of 2014. Felipe will go through the financials in more detail later. Let me now turn to the Mexican market and Modelo's leadership position. Turning to slide eight, we like the Mexican market very much. The country has solid macroeconomic fundamentals, a competitive business environment, favorable demographics for beer, a growing middle class. Hello, Erica? Hello?
Sir, you may proceed.
Okay. Sorry, everybody, for this. Again, turning to slide eight, we like the Mexican market very much. The country has solid macroeconomic fundamentals, a competitive business environment, favorable demographics for beer, a growing middle class, and significant growth potential. It is the second-largest economy in Latin America, with one of the highest per capita GDPs within developing markets. Real GDP grew by 4.6% in the first quarter of 2012, with strong growth expected to continue in the long term, driving an increase in private consumption. Overall, we expect a large and growing middle class to drive consumption, making Mexico an ideal geography for investment. On slide nine, you can see that Modelo is well-positioned in the Mexican beer market.
Beer is the largest alcohol beverage category in the country, with a more than 70% share, with favorable demographics resulting in two million additional people reaching the legal drinking age every year. Overall, Modelo holds the number one position in beer in the country with an approximate 59% market share and has consistently gained share in each of the last four years. Importantly, the Corona brand is the leading beer brand in Mexico with almost twice the volume of the second-largest brand. Modelo is a proven leader in Mexico, and we're excited about its future growth prospects in the region. Moving to slide 10. To serve their domestic market, the company has built a large distribution network with more than 80% of domestic volume being distributed through its own direct distribution system. Modelo has built a reputation as a best-in-class supplier, offering unparalleled service through this extensive network.
The Modelo network services more than 500,000 points of sale, including its own chain of retail stores, trading under the names of Modeloramas and Extra. The off-premise channel accounts for 85% of Modelo's domestic volume, with 75% of domestic volume being sold in returnable packages. On slide 11, you'll see that in addition to having an important domestic market, Mexico is also the largest beer exporter in the world. Mexican exports have grown at about 12% per annum since 1991, twice the rate of global exports. Today, Mexico accounts for 17% of world beer exports or approximately 21 million hectoliters, of which 17 million hectoliters comes from Modelo's brands. Impressively, Corona is the leading imported beer brand in 38 countries and the most popular Mexican beer worldwide. Given its brand heritage, global appeal, and distribution across geographies, Corona has become the fourth most valuable beer brand in the world.
Corona has helped Modelo to achieve solid organic growth. Slide 12 shows that total volume has increased consistently over the last few years, going from 52 million hectoliters in 2007 to 56 million hectoliters in 2011, with domestic volumes growing at an annual rate of 2.4% during this period. Outside its home market, Modelo's export business has been driven mainly by strong performances from the Corona and Modelo Especial brands. In summary, Modelo is a highly attractive business with a strong brand portfolio and a proven track record both at home and abroad. Let's look at why this transaction is compelling for both parties. Slide 14 shows that we've had a long-standing and successful partnership with Modelo that started when Modelo began importing and distributing Budweiser in Mexico in 1989, followed soon after by the introduction of Bud Light.
Since then, Anheuser-Busch brands have achieved several milestones in Mexico and are on track to reach one million hectoliters in the near future. On the investment side, Anheuser-Busch acquired an 18% stake in Modelo in 1993, increasing this to over 50% by 1997, for a total investment of $1.6 billion. Given our long history together, we believe this transaction is the natural next step, cementing our long-term relationship. On slide 15, you can see that the combined company will lead the global beer industry, further strengthening AB InBev's existing position as the world's largest brewer. Based on 2011 results, the combined company would have beer volumes of 409 million hectoliters and EBITDA of $17 billion, well ahead of other players in the industry. Slide 16 looks at 2012. We estimate the combined business would have revenues of $47 billion and EBITDA of $18 billion on an illustrative 2012 combined basis.
Furthermore, with the addition of Corona, Modelo Especial, and Victoria, the number of billion-dollar brands in our portfolio would increase from 14 to 17 billion-dollar brands. Slide 17 shows that Modelo is the leader in the world's fourth-largest profit pool, complementing AB InBev's leadership positions in other key markets. The combined company will hold the number one position in four of the top five profit pools globally: U.S., Brazil, Mexico, and Canada. On slide 18, you can see that Modelo also increases AB InBev's exposure to those beer markets, which are expected to have the greatest volume growth potential in the next decade. Slide 19 shows that the combination will bring together five of the top six and seven of the top 10 most valuable beer brands globally, each having their own distinct imagery and consumer positioning.
As I mentioned earlier, BrandZ ranks Corona as the fourth most valuable beer brand in the world, complementing the leading positions of Bud Light and Budweiser. Moving now to slide 20. Here you can see that after the combination, we'll have an outstanding portfolio of 17 billion-dollar brands measured in retail sales terms with brand heritage from around the world. Corona and other Modelo beer brands will make a significant contribution to the dynamism and growth potential of the joint portfolio. Turning to slide 21. Corona will also join Budweiser as a global flagship brand. Corona is present in more than 180 markets, and it's the leading import beer in 38 countries, an amazing achievement, with total export volumes of 12.7 million hectoliters in 2011. We're very excited to have Corona and Budweiser join forces on the global stage.
As with Budweiser, we believe that Corona has a unique brand position with appeal to consumers around the world. The brand encapsulates a relaxed lifestyle with a proud Mexican spirit and heritage and complements our portfolio very well. According to a recent ranking published by Interbrand, Corona has been included in the top 100 best global brands list across all categories, not just beer, for two consecutive years, and is the first and only Mexican and Latin American brand to be included. In addition, it was recently named one of the top 10 most valuable brands in Latin America by BrandZ. We believe that Corona should see significant benefits from our global platform, as evidenced by the growth of Budweiser, which is shown on slide 22. We have successfully driven the expansion of global Budweiser in recent years, with volume outside the U.S. growing by 45% since 2009.
In 2011, almost 44% of the brand's sales came from outside the U.S., compared to just 28% in 2008. The strength of our distribution system has played a major role in the growth of Budweiser. With this knowledge, experience, and track record, we feel confident that we can add to Corona's already strong growth potential. With that, let me hand you over to Felipe, who will take you through the rest of the presentation. Felipe?
Thank you, Brito. Let's turn to the financial highlights of the transaction, starting with slide 24. We believe this transaction creates significant synergy potential. As Brito just mentioned, we expect to achieve revenue synergies through further global expansion of Corona utilizing AB InBev's global distribution network. We have many learnings from Budweiser, and we believe we can use that experience to further expand Corona. In addition to the top-line growth opportunities, the combination will also deliver cost-related synergies of at least $600 million annually, phased over four years. This will come from global procurement opportunities, sharing of best practices, and efficiencies in overhead and IT platform costs. Water consumption is just one example of where we can share best practices in both directions. Modelo's water usage is best in class, and we look forward to improving performance in our breweries based on their learnings.
We believe we can also secure one-time cash flow synergies of approximately $500 million, phased in over two years, primarily from working capital improvements. Slide 25 shows the simplified Modelo corporate structure as a result of the proposed transaction. Once the transaction is complete, Diblo and DIFA will have merged into Modelo, and AB InBev will have voting control of the company. Furthermore, Crown will become a fully owned subsidiary of Constellation Brands after the sale of Modelo's 50% interest. Let me say a few more words on the Crown agreement, which is covered on slide 26. Crown will remain the U.S. importer for Modelo brands. Modelo will sell its existing 50% stake in Crown to Constellation Brands for $1.85 billion, giving Constellation Brands 100% ownership and control of Crown.
As a result, Modelo's brands will continue to be imported, marketed, and distributed independently in the U.S. through Crown on similar economic terms to those it receives today. Crown will continue to manage all aspects of the business, including marketing, distribution, and pricing decisions, while AB InBev will ensure the continuity of supply, quality of products, and ability to introduce innovations. The agreement also provides AB InBev with the right, but not the obligation, to exercise a call option for 100% of the maximum brands embedded into Crown every ten years at a fixed multiple subject to regulatory approval. Constellation has committed financing in place to complete the transaction. Moving to slide 27, AB InBev has all the necessary financing in place to complete Modelo transaction. We have added $14 billion of new bank facilities to supplement our existing liquidity.
This new financing consists of a $6 billion term facility with a maximum maturity of two years and an $8 billion three-year term facility, both from funding date. Our expected owing pre-tax cost of the facilities is around 2%. As a result, AB InBev now has total liquidity between cash and long-term committed facilities of over $24 billion. Our target capital structure remains at two times net adjusted EBITDA, and we expect to be below this level during the course of 2014. Now please turn to slide 28. The transaction enterprise value is estimated at $32.2 billion before the sale of the 50% interest in Crown. The Modelo EBITDA for 2012, assuming full consolidation of Crown and DIFA, is estimated at $2.5 billion, implying an enterprise value to EBITDA multiple for the transaction of 12.9 times before synergies.
The transaction enterprise value consists of the total consideration of $20.1 billion, plus the value of AB InBev's existing interest in Modelo and Diblo of $13 billion and minus the latest published cash balances in Modelo of $2.7 billion. The transaction enterprise value also includes the value of the 50% of Crown, which Modelo does not own. This needs to be included in its transaction enterprise value, since the estimate of EBITDA assumes full consolidation of Crown's results. The enterprise value after the elimination of the 50% interest in Crown, which Modelo does not own, and also after the disposal of the 50% interest in Crown, which Modelo does own, is $28.5 billion. The associated EBITDA is $2.7 billion after synergies, implying an enterprise value to EBITDA multiple of 10.8 times. Slide 29 summarizes the sources and uses of funds for this transaction.
The total consideration, including the purchase of the 53.5% interest in DIFA, will be at $20.1 billion. The net cash requirement to close the transaction is reduced to $14.2 billion as a result of the proceeds, which we will receive from the disposal of the 50% interest in Crown of $1.85 billion, the active reinvestment in AB InBev by two Modelo shareholders of $1.5 billion, the estimated cash balances in Modelo of $2.7 billion, minus fees and transaction costs of $200 million. This net cash requirement will be met from the new $14 billion bank facilities, plus existing AB InBev cash. I would now like to briefly recap our track record with AB InBev, starting with slide 31. AB InBev has a history of successfully completing combinations, integrating businesses, and creating shareholder value.
We have grown through a number of value-creating combinations over the last 25 years, uniting brewing leaders in Belgium, the U.S., Canada, Brazil, Argentina, and Germany to become the worldwide leader in the beer industry. Of course, two of our most recent and largest transactions have been the Interbrew-AmBev combination in 2004, followed by the InBev-Anheuser-Busch combination in 2008. On slide 32, you'll see that AB InBev has a track record of delivering on its commitments and financial targets through efficiencies, increased profitability, and strong cash flow generation. We have seen continuous improvement in profitability through brand building, top-line growth, economies of scale, and sharing of best practices. We grew both revenues and EBITDA consistently after the Interbrew-AmBev and the InBev-Anheuser-Busch combinations, with CAGRs well into double digits on a reported basis.
Most recently, we were able to over-deliver on our commitment on synergies from the InBev-Anheuser-Busch combination and exceeded on the leveraging targets after the completion of the transaction. As a result, turning to slide 33, AB InBev today is the global leader in beer, consistently delivering high levels of EBITDA and EBITDA margin. In 2011, despite weak consumer confidence in several of our markets, we were able to deliver record EBITDA margin of over 39%, driven by our focused brand strategy, growth from innovations, strong execution in the field, and good cost management. Over a span of two decades, the industry landscape has been transformed, as you can see on slide 34. Through a combination of organic growth and M&A, we have built a global leader, selling over 350 million hectoliters of beer and generating over $15 billion in EBITDA.
Most importantly, we have generated superior returns for our shareholders, on slide 35, you can see that since the creation of InBev in 2004, our share price has outperformed other top consumer goods companies by a large margin. Finally, slide 36. We are committed to our dream of becoming the best beer company in a better world, to this end, have built and implemented a number of successful corporate responsibility programs. We are pleased that Modelo is equally committed to sustainability programs and giving back to the communities in which they operate. In fact, Modelo is at the forefront of promoting environmental care and sustainable growth. The evaluation of alternative fuel sources being just one good example of this commitment. We believe our combination will enable us to further enhance our respective programs through best practices sharing.
Before heading to Q&A, let me highlight the next steps in the process by turning to slide 38. There are a number of steps that need to be completed before the transaction can close. First, we will be making the necessary filings and seeking regulatory approval in the U.S., Mexico, and other countries. Following these approvals, we will then proceed with the merging of Diblo and DIFA into Modelo, followed by the tender offer for the Modelo shares not currently owned by AB InBev. Modelo will also sell its 50% interest in Crown to Constellation Brands, and we expect the transaction to be completed during the first quarter of next year. In summary, this is an exciting and compelling combination. We are pleased to be joining our two companies after many years of partnering together, and we see great potential to further growth of our brands around the world.
We are looking forward to making this combination a big success, and with that, I'd like to turn the call back to Erica for the Q&A section. Thank you.
Ladies and gentlemen, at this time, if you wish to ask a question, please press *1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by 2. We ask that you please limit your questions to one question and a follow-up. Please stand by for your first question. Your first question comes from the line of Sachin Shah with Tullett Prebon. Please proceed.
Hi, good morning. Thanks for taking my question. I just wanted to find out the regulatory side, HSR is required. What's your comfort level of getting that because you already have 50% or so market share in the U.S.? Are you planning on making divestments? Also, just to be clear on the other approvals, Mexico and others, what specifically are the others? Are they EC? Is it with China, et cetera?
Well, thanks for the question. As it's common with transactions of this size, notifications are required in several jurisdictions, as we expect filings to be made in the U.S., Mexico, and some other jurisdictions. We'll work proactively with regulators to move through the review process efficiently. We believe this transaction should be approved.
We believe the transaction brings no change to the U.S. market. Crown will be owned 100% after the sale of the 50% owned by Modelo to Crown. Constellation will own 100% of Crown in the U.S., and Crown will remain the sole importer of Grupo Modelo brands into the U.S. market. We'll have decisions on marketing, distribution, pricing of the brands in the U.S. market.
Okay. You feel comfortable that you're going to be able to make the necessary divestments in the U.S. to get HSR? Just to clarify, are you going to need EC? Are you going to need Chinese MOFCOM? Maybe you can outline some of the specific approvals that are needed.
Again, we expect filings to be made in the U.S. and Mexico and other jurisdictions. We'll look at them as we progress. Today, we're just announcing the transaction. We'll have to look at each jurisdiction and have a judgment on where we should file.
Okay.
The U.S. and Mexico for sure.
Okay. You are expecting the deal to close first quarter of 2013, second half of 2013?
Well, it was said in our statement first quarter of 2013.
Okay, fair enough. Thank you. Congratulations.
Thank you very much.
Our next question comes from the line of David Lalonde with Morgan Stanley. Please proceed.
Yes, hello, and congratulations for the deal. First of all, just wondering regarding the management of operations in Mexico, will that go to a CEO appointed by ABI, potentially somebody from ABI or from AmBev? Just wondering. Regarding the cost of debt, you mentioned a 2% cost. Will there be any currency hedging on that might increase the effective cost for MXN?
Well, hi, David. It's Brito here. In terms of management of the Grupo Modelo business in Mexico, it's going to be business as usual until, of course, transaction closes. The way we're going to structure the management of Grupo Modelo going forward after closing, we're going to communicate that in due course.
Picking up on the second part of the question regarding the cost of funding. Modelo, as a natural exporter, generates a cash flow which is essentially in dollars, over 90% in dollars, therefore, there will be no need for hedging on this case.
Your cost of debt will really be 2%, no more than that. Just one question on the agreement with Crown. Obviously, I understand that they will be independent from a pricing perspective, but I was just wondering what's the trends for pricing agreement between you and Constellation Brands? In the past, there was a step up between Modelo and Crown. Every year, the price was going up. I don't know whether that will continue for the next few years or whether this is a decision that will be made on a yearly basis. If you could shed some color on that'll be fantastic.
Well, Dave, the spirit of the existing contracts will stand and again, Crown will be buying the 50% that it doesn't own. Constellation will be buying 50% it doesn't own already on Crown, so it will own 100% of it, and therefore will have total control over marketing, pricing, distribution in the U.S. Under the terms of the agreement, they will continue to be the sole importer for Grupo Modelo's brands into the U.S. market.
The mechanism in terms of your pricing to them, that's not going to change from what it is today?
The spirit of the existing contract will stand.
Okay. All right. Thank you.
Our next question comes from the line of Anthony Bucalo with Santander. Please proceed.
Thank you. Congratulations, Brito. Just a quick question on the potential for the Bud family in Mexico. I am curious to see if you can use your experience in Brazil right now to roll those brands out maybe more quickly or efficiently, especially in the northern territories where you have a rather porous border and a lot of back and forth between the U.S. and Mexico.
Well, the track record of Bud and Bud Light in Mexico, being distributed by Grupo Modelo, our partners, has been a great one. We started selling Budweiser in Mexico in 1989, then followed by Bud Light in 1993, and those brands are going to reach the 1 million hectoliter mark in the near future. They're doing very well, and Bud Light today is the number 1 import brand in Mexico. I think, of course, we see great opportunity to bring some other brands of ours within the import segment, and that is something that we're committed to do, giving consumers in Mexico even more choice. We also see, given the new competition we have in the market there, that some other competitors are also investing in the import segment. We're very excited about the prospects.
Just as you said, in Brazil, the same is occurring, and that the import segment will tend to grow as a segment within beer.
Do you see any significant step up in investment behind those brands now that your two companies are integrated and there's less inherent conflict in the relationship?
Well, our companies have always been very aligned in developing the brands in Mexico. At this point, Tony, we're totally focused on completing the transaction and in due course, we'll communicate a bit more on the plans for the brands.
Great. Thanks so much.
Welcome.
Our next question comes from the line of Pablo Zuanic with Liberum Capital. Please proceed.
I have just three questions. First, Brito, as you did the due diligence, when you look at the profit margins of Grupo Modelo, 26%, and you know AmBev in Brazil, almost close to 50%. As part of the due diligence, what did you see in terms of, are there any structural reasons why margins would be so different, or is there just a very significant upside opportunity for margins at Grupo Modelo? The second question, I know we touched already on the Crown Imports concerns, but in the call you mentioned that there will be some coordination in terms of innovation in the future, what else? Can you elaborate on that? For example, could Crown Imports choose to move some of their distribution to back wholesalers if they chose to on their own, not necessarily with any ABI input. If you can just elaborate on that.
The third and last one, I realize it's too early to answer all these questions, can you just remind us of the size of Budweiser in China compared to Corona, just to have an idea what the potential of Corona would be there? Thank you. Again, congratulations to everyone.
Well, Pablo, okay, let's go one by one. I'll start by the last one. I mean, Budweiser is way bigger than Corona in China these days. I don't have the specific numbers here in front of me. Of course, Budweiser leads the import segment with a 42% share of the premium segment, super premium segment in China. Corona, in our view, has a very promising also future in China for sure, but it comes from a much lower base. In terms of supplier, in terms to Crown in the U.S., again, Crown will be 100% owned by Constellation going forward, will be the sole importer of Grupo Modelo's brands into the U.S. market, and will have 100% decision-making power on pricing, marketing, and choice of route to market and wholesalers as they have today. No change there.
In terms of your first question, the synergies we announced of $600 million in terms of cost synergies to be phased in four years, and $500 million in a one-time cash flow, mostly working capital type synergies. They come exactly from comparing businesses, comparing best practices, and also more scale in terms of global procurement. Those are the sources that brought us, that caused us to come with these two numbers, 600 and 500, in terms of cost synergies and working capital, I mean, cash flow synergies.
All right. Thank you.
Okay. Thank you, Pablo. Next question.
Our next question comes from the line of Chris Pitcher with Redburn. Please proceed.
Good afternoon, gentlemen. Just quick, can I just clarify, I think I might have missed something. The synergy target of $600 million that you're discussing, is that purely a cost synergy number?
Yeah.
Sorry, Brito?
Yes, it's a cost synergy number. $600 million per annum to be phased over four years.
Okay. Then in terms of the potential revenue synergies from Corona, can those be achieved within the existing structure of the Corona imports? Because obviously the rights or the agreements are being struck in Russia, the U.K., and China with other parties. Do you expect to run those to termination? Will there be termination fees? How do you expect to get hold of Corona in those markets?
Well, Chris, the first thing we need to say is that we're going to respect all existing contracts. Okay? At the time, when the time is right, on a per market basis, we'll see what's best for the brand. The brand has been developing in a very nice fashion around the world and we want to keep that momentum going. In terms of the synergy number of $600 million to be phased over four years, yes, it's only cost synergies, we do recognize that there is something that we haven't put in numbers, which is a big potential top-line synergy in that we see a big opportunity to expand Corona brand on a global basis as we did with Budweiser, global Budweiser in the last three years. That's not in the 600.
Thank you very much.
Welcome.
Our next question comes from the line of Mark Swartzberg with Stifel Nicolaus. Please proceed.
Thanks. Morning, Brito. Morning, everyone.
Morning.
It's really a follow-up to Chris's question. Can you speak generally to the nature of those distribution agreements in Canada and in some other markets? Is it fair to think of them as being closer to at will or fairly short duration in nature, or can you give us some characterization of the nature of those contracts?
Well, to be totally honest, we haven't had access to a lot of these contracts because they'll have to be treated in between signing and closing in clean room type environments because they have confidentiality clauses. We have no access to those contracts. Again, in due course, we'll learn more about those.
Okay. Fair enough. Thanks, Brito.
Welcome.
Our next question comes from the line of Andrew Holland with SG. Please proceed.
Yeah. Hi. Just coming back to the disposal of your share of Crown, can you tell us why you're doing that? I have my ideas on why that might be, but I'd be interested to hear what your explanation for that disposal is.
Well, Andrew, the idea was very simple. Before this transaction was announced, and for the many, many years in the past, AB and AB InBev had no insights into Grupo Modelo's business in the U.S. through the joint venture, with Constellation through Crown. Our intent is to continue to be in that position of having no insights into Grupo Modelo's brand business in the U.S. through Crown. That was the motivation behind this proposed agreement.
Given the opportunity to get some insights into Modelo's business in the U.S. through Crown, you chose not to take that opportunity?
We never had that opportunity before because there were the walls, because it was the U.S. business. This partnership has been going on for 20 years, and we never had access. The old AB company, the ABI combined company with AB, we never had the access to any U.S. information. Going forward with the proposed transaction with Crown or Constellation, we'll continue the same position. We'll continue not to have any access to U.S. information concerning Grupo Modelo's brands being sold in the U.S. market.
Okay. Was that a condition of the deal being encouraged, if you like, by antitrust authorities? Obviously, you still got to get clearance, but have you had an indication that that was what they would require?
No, that was an idea of the whole transaction in terms of keeping the status quo in the U.S.
Okay. That's very clear. Thank you.
Our next question comes from the line of Sanjeet Aujla with Credit Suisse. Please proceed.
Hi there, gentlemen. A couple of questions, please. Can you firstly just clarify or quantify the sales and EBIT currently generated by Modelo's selling Crown Imports? Also, can you just mention or clarify the nature of the working capital benefit and to what extent that might be linked to any exclusivity payments you pay out to Mexico, Modelo pays out to Mexico at the moment? If those exclusivity payments form any part of your synergy target.
Let me answer the second one first on the working capital or cash flow synergies of $500 million. Then Felipe will answer the first one. On the $500 million synergies, not all of it, but most of it will come from working capital, and that's about receivables, payables, inventories. Not all of it. I think as a company, Anheuser-Busch InBev has shown since 2006 how much best practices we have developed in terms of cash conversion and in terms of getting net working capital to be negative within our business. With this toolkit in mind, we're going to apply those best practices in the new combined company. Now to the first question.
Yeah, the total Crown EBITDA is estimated to be around $400 million for the U.S. business.
Sure. Can you just quantify the sales that Modelo makes directly to Crown? Because obviously Crown now won't be consolidated within Modelo's accounts, but you will still receive a revenue benefit from selling to Crown, and I just wanted to gauge a quantity there, if you could disclose that.
Yeah, I'm afraid that number is not public. We're going to follow up, and if public, we'll come back to you. I'm afraid it is not.
Sure. Just last question. Can you just clarify the cost of debt? The way I've understood it is pre-tax cost of debt is 2% on your facility, is that correct?
Yes, for the-
Even the cost of the facility.
Well, that is the owing cost for the bank financing package.
Many thanks.
You're welcome.
Our next question comes from the line of Caroline Levy with CLSA. Please proceed.
Good morning, and congratulations. Three quick questions. Can you explain where you got the fair value of $13 billion for your existing stake of Grupo Modelo, what that reflects? The second is, will there be an impact on your tax rate? The third is, do you anticipate having to make any divestitures of brands in the U.S.?
Well, the first one. Sorry. Is the fair value. Okay. That is estimated to be the fair value of the Modelo business without premium as per the IFRS 13. We believe that to be the best reference for us to put a value for the 50% stake we own. That equity investment historical cost is like $1.5 billion, which is very low. As per the opening balance sheet of the Anheuser-Busch InBev transaction, that investment was valued, not long ago, in 2008, at around $7 billion. We are updating that number to $13 billion given the performance of the business. Modelo tax rate is approximately 23%, which is very much inside our effective tax rate. There was a third question, or am I wrong?
The third question is about divestitures.
Oh, okay.
We don't anticipate any divestitures other than the transaction that we already explained of Modelo selling its 50% stake in Crown to Constellation at the time of closing.
Thank you very much.
You're welcome.
Our next question comes from the line of Simon Hales with Barclays Capital. Please proceed.
Good morning, gentlemen. Three quick questions if I can as well, please. Firstly, just going back to the synergy capture, can you give us an idea of just how they will phase over that four years, Brito? Is it more front-end loaded, the $600 million? Perhaps also, what costs you're thinking about for delivering that $600 million of synergy? Secondly, what WACC are you using on the transaction yourself? Thirdly, I wonder if you could just give a bit more detail on the deferred share instrument you're planning to use for the Modelo guys to invest their $1.5 billion back into ABI shares, going forward. Thanks very much.
Synergy captured. Between signing and closing, we'll be working together with Modelo management team in order to further detailing the plan. Anheuser-Busch transaction synergies were more front-loaded, but at this stage we are assuming it's phased in four years. As we progress in the integration planning, we'll keep you updated on that. At this stage, we are not anticipating any material costs associated to the capture of those synergies as well. Mix is ballpark 40% linked to variable and 60% linked to fixed costs, and that is coming from best practices as well as global procurement efficiencies. The second part was WACC?
Yes.
WACC for the transaction, we used 9%, 9.25% to be more precise. When we say we are going to cross that hurdle by year three, it's obviously the transaction WACC, not the overall company's consolidated WACC of 7%. That hurdle we are going to cross even much sooner. This being a fully leveraged transaction at very affordable rates, we feel it's extremely accretive. Third question is regarding deferred share instrument. It's quite simple. We have up to five years to deliver the shares, and we reserve the right and the flexibility to buy back or to issue new shares. We'll manage it accordingly within the five years period.
That's very clear. Thanks very much, and congratulations.
Thank you. Welcome.
Our next question comes from the line of Adam Spielman, Citi. Please proceed.
Yes. I'd like to come back to an earlier answer. You said that 90% of the profit, I think, was in $, which is why you said you didn't need to hedge.
Sorry. Cash flow.
Of a cash flow.
Yeah.
How does that work? Does that mean to say that almost all the profit that this company makes is being generated through the export arm? How should I think about the cash that's generated internally?
Well, because the cost of goods sold is essentially in MXN, and you basically cross that out with the revenues generated in MXN for the domestic sales. Then basically you are left with the revenues in $. That is the biggest component by far for the cash flow.
Does that mean to say the profitability of a Mexican domestic business-
No
is very substantially lower than the export business? How do we achieve profitability?
No. What I'm doing is, I'm basically assigning the cost of goods sold of the domestic sales and the cost of goods sold of the export business into the domestic revenues only. Therefore, the Mexican domestic profit is high in local currency, and the same way the revenues from the export business or the profitability of the export business. As a matter of cash flow, you can basically eliminate both costs of products being sold domestically and costs of products being sold abroad from the pesos-denominated revenues. Then you end up with essentially US dollars cash flow on a net basis.
Thank you very much. That's very clear.
You're welcome.
Our next question comes from the line of Trevor Stirling with Bernstein. Please proceed.
Hi, Brito. Hi, Felipe.
Hello.
Sorry, can you hear me?
Yeah.
Yeah.
Oh, hi, Carlos Brito, Felipe Dutra. What would you do if the Department of Justice take the same approach as in the case of Labatt and oblige you to dispose of the U.S. rights to Modelo's brand and oblige the new owner to change the manufacturing supply?
Well, we believe this transaction should be approved. We'll work proactively with regulators to move through the review process in an efficient way. You have to remember that AB InBev already has an economic interest in Grupo Modelo of more than 50% as of today, and this is a continuation of a relationship that's more than 20 years old. Crown will remain the U.S. importer of Grupo Modelo's brands as it is today, so no change. Constellation will have now 100% as opposed to 50% of Crown. Grupo Modelo brands will continue to be imported, marketed, and distributed independently in the U.S. through Crown Imports. That's why we say we believe this transaction should be approved.
All right, thank you. I have a quick follow-up. Apart from the tax question we saw earlier, any other tax implications?
Well, not at this point. We have further refined the planning, we are not anticipating anything at this point in regards to that.
Great. Thank you very much.
You're welcome.
Our next question comes from the line of Carly Costello with J.P. Morgan. Please proceed.
Hi. My question is related to the Constellation. Will they pay you a royalty for use of the Modelo brands?
Well, the terms, the spirit of the existing contracts will remain, will stand. That's pretty much what we're saying at this point.
Okay. The existing contract and the existing profitability from the Crown JV would not change, just they would include a 100% instead of 50. Is that right?
Yeah. The revenue upstream will all be incorporated into a new transfer price.
Okay. Thank you.
You're welcome.
That's all the time we have for questions at this time. I'm going to now turn the call back over for any closing remarks.
Well, thank you very much, everybody, for your time, for your questions. I would like to say once again that we're very excited with this combination that's being proposed today. There's, of course, much to be done between now and closing. I'd like to thank Carlos Fernández a lot for being present on this call. Carlos has been a true partner for many, many years, has been the guy who really built this business for the last 15 years as a great CEO, and will be a great resource for us and the new combined company as a truly very strong and knowledgeable board member in Mexico. Carlos, thank you very much. Carlos, if you want to say something, please feel free to do so.
Well, thank you so much again, Carlos, for your kind words. I'm very excited about this combination. I'm very excited of the possibilities we have forward. Evidently, I'm excited to see where Grupo Modelo can go partnering with Anheuser-Busch and with your leadership, Carlos.
That's awesome, Carlos. Thank you very much, and thanks, everybody, for participating. Thanks a lot. Have a great day.
Thank you.
Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.