What Are the Next Steps in the Arbitration Between Grupo Modelo and Anheuser-Busch?

Is Grupo Modelo really trying to block InBev’s takeover of Anheuser-Busch?

Probably not. But that threat may be the cudgel by which it renegotiates its alliance with Anheuser-Busch–and A-B’s soon-to-be owner, InBev. Grupo Modelo, which is 50% owned by Anheuser-Busch, broke its Mona Lisa-like public silence about the deal by filing a notice of arbitration against A-B, arguing that the St. Louis brewer isn’t allowed to transfer its Modelo stake to InBev.

Modelo’s complaint is twofold. Modelo cites a 1993 partnership agreement between the two companies to argue that A-B can’t transfer its Modelo shares to InBev without Modelo’s permission. The Mexican brewer also argues it has the right to buy back the Modelo shares that A-B holds now that A-B is being sold.

InBev and A-B, of course, disagree. They note that the 83-page agreement has no “change of control” provision specifically designed in the case of an acquisition. Modelo retorts that, if such an agreement wasn’t hinged on the possibility of a merger, what would be the point of it at all?

Deal Journal talked to people familiar with both sides of the argument. Here is the one thing they agree on: InBev and A-B aren’t concerned about the chance of the matter going to arbitration. “What InBev and Anheuser-Bush have done is give [Modelo’s claims] the back of their hand since the beginning,” complained a person familiar with Modelo’s thinking. “It’s mealy-mouthed,” a person close to InBev and A-B said of the arbitration threat.

InBev and A-B say it would be unwise for Modelo to scuttle the deal, considering that A-B shareholders want that $70 a share deal price and probably would sue for it. That could result in a hefty legal tab for Modelo. For their part, A-B shareholders don’t seem concerned; the stock inched up 0.3% today to $59.95.

Stifel Nicolaus analysts Wednesday put a 90% probability on the deal’s completion at $70 a share; Standard & Poor’s today said it expects the deal to close. And InBev has being trying to soothe the nerves of investors in these volatile times; it obtained guaranteed financing, launched a charm offensive, and followed perfectly all the classic steps in a hostile takeover.

Still, “to be totally dismissive of the risks of an arbitration is particularly insane, particularly in this market,” warned one person close to Modelo.

Why would Modelo go to all this trouble? It must be remembered that in InBev Modelo is getting a partner it didn’t foresee when it struck the investment agreement. A person familiar with the situation said the Mexican brewer also is interested in improving the “commercial arrangements” of the partnership. And Modelo appears intent on buying back the shares A-B holds, and people close to Modelo suggest the agreement may provide a way to do that at a price below the $70 a share InBev is paying for all of A-B. The ultimate price of any buyback would be decided by the arbitrator.

So what happens from here? The participants choose a three-member arbitration panel, with each side getting to name one member and both sides having to agree on the third. Modelo already has chosen its nominee; A-B chooses its nominee in the next 15 days. Interestingly, the third nominee can’t be a citizen of either the U.S. or Mexico, a provision of the agreement designed to prevent either side from having a home-field advantage. But InBev is based in Belgium and Brazil and could play a role in suggesting the third person. The arbitration panel will be based in New York and apply Mexican law.

It isn’t a Cold War yet. Both sides tell us they are still in discussions.