Coca-Cola FEMSA, S.A.B. de C.V. (NYSE: KOF) will invest US$400 million to build two plants in Meoqui, Chihuahua (located a few hundred miles southwest of Big Bend Ranch State Park, Texas), according to a U.S. Commercial Service report.  US$275 million will be used to fund a brewery and US$117 million will be used to fund a glass bottle manufacturing facility.  The report said that the construction of the plants could provide opportunities for foreign companies providing brewing and/or bottling equipment, supplies, and parts as well as construction equipment and supplies.

Heidi N. Moore at The Wall Street Journal has written a nice piece on the arbitration proceeding between Grupo Modelo and Anheuser-Busch/InBev related to the proposed acquisition by InBev of A-B.  The piece has been copied in full below:

Grupo Modelo said it did not wish to buy back the 50% stake that its U.S. partner Anheuser-Busch holds in the Modelo/Anheuser-Busch joint venture, according to a Reuters report released today. 

It appears that the Modelo statement was issued to refute an article in the October 17, 2008 edition of The Wall Street Journal, which speculated, citing people familiar with the matter, that Modelo wished to buy back the stake.

A spokeswoman for Modelo quoted in the Reuters report said, “We want them (Anheuser) to respect our right to decide who is our partner,” referring to the rationale for the arbitration proceeding that Modelo initated against Anheuser-Busch on October 16, 2008.   Analysts believe Modelo may be seeking more money from Anheuser-Busch and/or InBev or to block the merger. 

The arbitration could delay the merger, depending on InBev’s concerns about the viability of Anheuser-Busch stake in the Anheuser-Busch/Modelo joint venture, which a material asset of Anheuser-Busch. 

The first step in the arbitration proceeding will be the appointment of arbitrators, which will be selected in accordance with Section 12.1 of the parties’ 1993 Investment Agreement.

On October 16, 2008, Grupo Modelo, S.A.B. de C.V., its Series A Shareholders, and its subsidiary Diblo, S.A. de C.V. (collectively, the “Modelo Parties“) filed a notice of arbitration against Anheuser-Busch Companies, Inc., Anheuser-Busch International, Inc., and Anheuser-Busch International Holdings, Inc.  According to the Anheuser-Busch press release on the matter:

The notice of arbitration claims the transaction between Anheuser-Busch Cos. Inc. and InBev S.A./N.V. violates provisions of the 1993 investment agreement between Anheuser-Busch International Holdings Inc., Modelo and other parties. It seeks pre-closing and post-closing remedies, including an order prohibiting Anheuser-Busch from exercising certain governance rights under the investment agreement, from impairing the right of first refusal of the Series A shareholders under the investment agreement and from any other alleged breach resulting from closing the transaction with InBev or otherwise, as well as monetary damages.

The notice of arbitration is not a public document, but based on our review of the 1993 Investment Agreement, it appears that the centerpiece of the Modelo Parties’ argument is Section 6.6 of the Investment Agreement, which prohibits the parties from selling or offering to sell their Grupo Modelo shares to “any [person or entity] or its controlling shareholders engaged, directly, or indirectly, in the production, distribution, or sale of beer in or to the United States or Mexico”.  As we noted in a July 28, 2008 post, this argument appears to be a stretch of the plain language of the 1993 Investment Agreement, as amended by the First Amendment and Second Amendment thereto.

Grupo Modelo CEO Carlos Fernandez was reported today to have said that “Grupo Modelo is reserving its contractual rights” under the 1993 Investment Agreement between Grupo Modelo and Anheuser-Busch, as amended by the First Amendment and Second Amendment thereto (MLB could not locate a copy of the First Amendment).  This was a follow-up to Grupo Modelo’s mid-July statement proclaiming, “our agreement with Anheuser-Busch was carefully constructed to ensure we have a definitive say in who our partner is”.  Grupo Modelo’s rights under the Investment Agreement are not as clear as its statements might lead one to believe.

What are Grupo Modelo’s rights under the Investment Agreement?

Several provisions of the Investment Agreement might give Grupo Modelo certain rights in relation to the InBev/Anheuser-Busch transaction, but no provision of the Investment Agreement clearly indicates the parties’ rights and obligations in the event of a change in control of Anheuser-Busch. 

Section 6.6, for example, prohibits Anheuser-Busch and Grupo Modelo from selling or offering to sell their Grupo Modelo shares to “any [person or entity] or its controlling shareholders engaged, directly, or indirectly, in the production, distribution, or sale of beer in or to the United States or Mexico”.  This clause prohibits sales of Grupo Modelo shares to competitors of Anheuser-Busch and Grupo Modelo.  Since Anheuser-Busch is not selling its Grupo Modelo shares (because InBev is acquiring Anheuser-Busch), the best Grupo Modelo could argue under Section 6.6 is that InBev’s acquisition of Anheuser-Busch should be construed as a de facto sale of Grupo Modelo shares to a competitor.  However, even if that argument is successful (which is unlikely), the Investment Agreement does not specify Grupo Modelo’s remedies in such a situation.

The buy-sell provisions in Section 6.2 of the Investment Agreement might be applicable if Grupo Modelo’s de facto sale argument in the above paragraph prevails, but Section 6.2 was clearly intended to prohibit transfers of Grupo Modelo shares by Anheuser-Busch, not to prohibit Anheuser-Busch from transfering Anheuser-Busch shares to a third party.  For the record, Section 6.2 prohibits Anheuser-Busch from disposing of any of its shares in Grupo without first offering those shares to Messrs. Antonino Fernandez R., Pablo Aramburuzabala, Nemesio Diez R., Juan Sanchez-Navarro y P., Valentin Diez M., and the other Grupo Modelo shareholders (collectively, the “Controlling Shareholders“).  After Anheuser-Busch offers its Grupo shares to the Controlling Shareholders, the Controlling Shareholders and Anheuser-Busch must enter into good faith negotiations regarding the purchase price to be paid for such shares by the Controlling Shareholders. 

What if InBev/Anheuser-Busch and Grupo Modelo fail to agree on their rights and obligations under the Investment Agreement?

If there is a dispute between InBev/Anheuser-Busch and Grupo Modelo regarding “the validity, intent, interpretation, performance, enforcement or arbitrability” of any terms of the Investment Agreement, it is to be decided by majority vote of Grupo’s board of directors, provided that at least 2 board members appointed by Anheuser-Busch are included in such majority.  (The Second Amendment to the Investment Agreement gives Anheuser-Busch the right to appoint 9 board members and gives the Controlling Shareholders the right to appoint 10 board members.) 

If the Grupo’s board of directors is unable to resolve the dispute by obtaining such a majority vote within 30 days, then Anheuser-Busch and the Controlling Shareholders are to each appoint one nominee to a special committee, which must attempt to resolve the dispute amicably.  If the special committee fails to resolve the dispute within 30 days, then the dispute is to be resolved by an international arbitration panel consisting of 3 arbitrators: one appointed by the chairman of Anheuser-Busch, one appointed by the Controlling Shareholders, and one appointed by the two arbitrators appointed by Anheuser-Busch and the Controlling Shareholders.  Arbitration is to take place in New York City under the UNCITRAL Arbitration Rules.

In the event that Anheuser-Busch and Grupo Modelo have a “fundamental business disagreement” (e.g., after the close of the InBev/Anheuser Busch transaction, there is a dispute regarding a change in the charter or by-laws, a change in dividend policy, corporate objectives, etc.), then the above-mentioned dispute settlement provisions do not apply.  Rather, Section 12.2 of the Investment Agreement allows Anheuser-Busch to require Grupo Modelo to purchase all of the Grupo Modelo shares held by Anheuser-Busch at the price paid by Anheuser-Busch for its Grupo shares.  This may be the least favorable outcome for InBev, particularly because analysts have estimated that Anheuser-Busch’s Grupo Modelo shares are worth approximately $10 billion, which is probably considerably more than Anheuser-Busch paid for the shares starting in 1993 under the Investment Agreement.

Grupo Modelo, S.A.B. produces something very near and dear to my heart: many of Mexico’s finest beers, including Corona (the top U.S. export), Modelo Especial, Negra Modelo, Victoria, and Pacifico.  Grupo Modelo’s brands represent approximately 56% of the Mexican beer market. 

InBev, NV’s $52 billion acquisition of Anheuser-Busch raises the question of what will become of the 50% non-controlling stake in Grupo Modelo owned by Anheuser-Busch.  A July 17, 2008 article in The Wall Street Journal reported that the agreement between Anheuser-Busch and Grupo Modelo gives Anheuser-Busch the right to fill 9 seats on Grupo Modelo’s 19-member board of directors and certain rights regarding areas such as capital expenditures.  (MLB has located a copy of the Investment Agreement governing the relationship between Anheuser-Busch and Grupo and the Second Amendment thereto, but MLB could not find the First Amendment anywhere.)   

The July 17, 2008 Wall Street Journal article also speculated that Grupo Modelo and its key competitor, Fomento Economico Mexicano, S.A.B. (FEMSA), might be sold as part of global consolidation in the beer industry, starting with the sale of Grupo Modelo to InBev.  FEMSA’s brands, including Sol, Tecate, Dos Equis, Bohemia, and Indio, account for approximately 42% of the Mexican beer market.  FEMSA is also the largest Coca-Cola bottler outside of the U.S.

It should be interesting to watch the InBev/Anheuser-Busch/Grupo Modelo relationship evolve.  The possibility that Grupo Modelo may engage in some posturing concerning its intent to purchase Anheuser-Busch’s 50% Grupo Modelo ownership interest should not be ruled out.  The Brazilian/Belgian-Mexican companies could be a powerful combination.