Mexico & USA: Top Mexican brewer Modelo, half owned by U.S.-based Anheuser-Busch Cos. Inc., might change its U.S. East Coast importer, Gambrinus. According to analysts that could cost the maker of Corona beer a hefty termination fee, but could also ramp up cash flow, Reuters posted on February 17.

Modelo is at loggerheads with its current East Coast importer, Gambrinus. The importer started an arbitration case last year to contest a 2006 termination clause in its contract with Modelo. "We are doubtful whether two companies (Modelo and Gambrinus) that are suing each other can work effectively together, especially when facing reinvigorated competition," said UBS analyst Jose Yordan.

Modelo's local rival, Femsa, maker of Sol and Dos Equis beers, made Dutch giant Heineken NV its U.S. sales partner at the start of this year, looking to dent sales of Modelo's Corona, the top imported beer in the United States.

Belgian juggernaut InBev, after buying Brazil's AmBev in a $9.7 billion deal last year, also plans to beef up its U.S. sales, putting further competitive pressure on Modelo.

Analysts reckon Constellation Brands, Modelo's U.S. importer west of the Mississippi and also known as Barton, has the best chance of winning the East Coast rights. "We believe the most desirable outcome would be for Barton to become the sole importer of its brands," UBS analyst Caroline Levy said in a report. "Costs could be substantially reduced through the elimination of ... marketing and sales functions and proceeds could be reinvested back into the brands." she said, estimating incremental cash flows of $700 million to $750 million.

Likewise, Morgan Stanley analyst Lore Serra said the market is likely underestimating the potential profitability increase if Modelo replaces Gambrinus. "(There is) a potential 7 to 8 percent boost in EBITDA and maybe more," Serra said. But other analysts see Modelo ending its import accord with Gambrinus at a cost.

"An arbitration expert could rule that the value created by Gambrinus amounts to having formed a franchise," Ixe brokerage said in a note, forecasting Modelo could pay out $260 million to end its business dealings with Gambrinus.

Modelo is openly analyzing different alternatives for its beer imports to the East Coast from 2007 and last month said it was confident of winning the arbitration case. Analysts wonder whether the legal battle with Gambrinus is already hurting Modelo's exports, especially in the increasingly competitive market. UBS's Yordan believes Heineken is "supremely motivated" to make its deal with Femsa work. "As a result, in 2005 and 2006 at least, we expect Modelo's U.S. volume growth to lag Femsa's," he said.

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