By Philip Blenkinsop
BRUSSELS (Reuters) - Anheuser-Busch InBev
AB InBev got half of Mexican brewer Modelo with InBev's 2008 acquisition of Anheuser-Busch. By taking full control it ensures a greater share of a growing market, while developed markets shrink, a global brand in Corona and the chance to cut costs.
After the U.S. Department of Justice's legal challenge to the $20.1 billion deal, the world's largest brewer has three options: a lengthy legal battle, a return to half-ownership of Modelo, or a concession to keep the deal alive.
Despite hardball talk that asset sales would be a deal breaker, the third option appears to be the best, analysts said.
They estimate the dilution to earnings per share would be 2-5 percent with a renegotiated deal or 10 percent if the acquisition fell through.
The Department of Justice (DOJ) has a strong case, according to lawyers.
Corona is exported to the United States by Crown Imports, a 50-50 joint venture of Modelo and Constellation Brands
Under AB InBev's deal, Constellation would buy out Crown, but AB InBev would remain its supplier and have the right to buy back the whole of Crown every 10 years.
If AB InBev does not wish to leave it to the lottery of the courtroom, it must accept the DOJ will only clear the deal if the brewer relinquishes this option and its Mexican link to the U.S. market, where the Budweiser-maker is already number one.
Read AB InBev's presentation on the Modelo deal and it is clear the prize is Mexico, the world's fourth-largest market in terms of profit generated.
Grupo Modelo has a 59 percent share of a market expanding at a respectable 2.4 percent per year. Top brand Corona sells double the volume of the number two and is exported to more than 180 countries.
Even without the United States, its main export market, AB InBev could retain Corona as a growing global brand.
Modelo has eight breweries in Mexico producing more than 70 million hectoliters per year. The sale of one or two could be the key to assuaging U.S. concerns.
The Piedras Negras facility, parked on the U.S. border, appears the most obvious candidate. Expanded, it alone could quench U.S. thirst for Corona and other Modelo brands.
However, Credit Suisse says Piedras Negras is the key to unlocking the synergy potential of the business, adding the sale of two others, deeper into Mexico, would have little impact on the $600 million annual cost savings AB InBev has targeted.
Trevor Stirling, drinks analyst at Bernstein Securities, said AB InBev could let slip more than $1 billion through the loss of production synergies and a forced sale of brewing assets.
"But consider that in the two days after the Modelo deal, AB InBev's share price went up 10 percent. So the market saw the deal as adding some $15 billion in value," he said. "It is more about Mexico than production synergies for the U.S."
Constellation would be the obvious buyer of assets worth more than $3 billion. That could prove a stretch, but its need for the deal is arguably even greater than AB InBev's - its shares fell 17 percent on Thursday, against a 7.8 percent decline for AB InBev.
Heineken, present in Mexico through its Femsa Cerveza, and Modelo itself could be other purchasing candidates.
Corona in future could resemble Fosters, an Australian beer sold in separate regions by Heineken and SABMiller.
Another option would be to dispose of some of its U.S. brands - such as the Michelob range or Rolling Rock - to bring its share of the U.S. market back below 50 percent.
If AB InBev did drop the deal, it could choose to reward shareholders with higher dividends or ready itself for a bigger scalp - a mega-merger with SABMiller
The latter would set it up for a further clash with U.S. antitrust regulators.
(Reporting By Philip Blenkinsop; Editing by Elaine Hardcastle)