Porsche, Corona Buyouts Tap New High End Consumers

NEW YORK ( TheStreet) -- An uncertain U.S. economy and the prospect of a Eurozone meltdown isn't stopping some longtime auto and beer partners from taking the plunge on big buyouts.

In consecutive weeks, the decisions by German auto giant Volkswagen to buy out a 50.1% stake in sports car maker Porsche for $5.6 billion, and Anheuser-Busch InBev's ( BUD) $20.1 billion deal to take control of Grupo Modelo, the maker of Corona beer, are the latest signs that amid a generally cautious M&A environment some corporate giants are buying out partners to scale their brands and operations, in anticipation of future opportunity.

The deals also come at a time of consolidation in the beer sector and as global automakers -- including growing emerging market players -- focus on diversifying and scaling their businesses to offer a spectrum of vehicles from hybrids and sedans to sports cars and trucks.

In the long-anticipated buyouts of Porsche and Grupo Modelo by Volkswagen and AB InBev, both deals target longtime family-owned partners that will help the respective auto and beer conglomerate's scale their operations and diversigy into new markets. After ending what's been a seven-year takeover battle between it and Porsche, Volkswagen will be able to fully integrate the Carrera and Boxter maker's designs to its vehicle fleet and production facilities, which already make VW the largest automaker in Europe.

Meanwhile, after buying out a long-held near 50% stake in Mexico's Grupo Modelo, AB InBev will acquire Corona, the most exported brand of beer to the United States, in a deal that will help world's largest beer conglomerate and the maker of Budweiser grow its brands in Latin America, one of the fastest growing markets, as suds sales in North America and Western Europe are expected to drop in coming years, according to Euromonitor.

While both deals are different in structure - Porsche's sale to Volkswagen comes after it raised nearly 10 billion euros of debt in a takeover attempt of VW in 2008 - they are similar in their objectives.

Porsche and Corona are highly recognizable brands in key markets where VW and AB InBev are lacking in presence. Synergy in both deals will come from some obvious short-term cost cuts as overlapping operations are integrated; however, in both instances, existing partnerships mean that deal benefits will also be a lasting revenue opportunity.

The mergers will also be a competitive boost after beer makers like Molson Coors ( TAP), SABMiller ( SBMRY) and Heineken ( HINKY) cut big deals to push into new markets -- and emerging market auto giants like Tata and Geely Automotive buy up brands like Land Rover, Jaguar and Volvo from the likes of Ford ( F) in an expansion into luxury vehicles.

In both competitive challenges -- emerging market beer consumers and luxury autos -- global conglomerates are fighting for faster than industry average sales growth. In June auto sales, it was the likes of luxury auto brands like Porsche, Mercedez ( DDAIF) and VW's Audi brand that posted among the industry's best results. Meanwhile, beer giants have recently cut multi-billion dollar deals for Presidente of the Dominican Republic, Australia's Fosters and StarBev of the Czech Republic, in an effort to diversify from lackluster developed market sales.

Still, Volkswagen and AB InBev are differentiated in their acquisitions of Porsche and Grupo Modelo relative to other recent auto and beer deals because of their long-lasting partnerships.

Porsche and Volkswagen trace their origins to auto pioneer Ferdinand Porsche, and over the years, both automakers have shared key components like engines, gearboxes and suspensions. For instance, in the late 1930's, the first Porsche sports car used components from the VW Beetle.

Recently, when VW decided to finally enter the sports utility vehicle market with its Touareg in the early 2000s, the company relied on components and designs from Porsche's Cayenne SUV -- and those of the Audi Q -- VW's most upscale brand prior to its Porsche acquisition. Currently, Porsche Cayenne's, Audi SUV's and the Touareg all share a similar chassis design and are manufactured at a VW factory in Bratislava.

The $5.6 billion purchase of a 50.1% stake in Porsche by VW ends what's often been a bitter relationship between the two European automakers. In the mid-2000s, Porsche began buying up shares in Volkswagen in a takeover attempt that escalated in 2008 then the sports car-maker took control of nearly 75% of VW's stock.

Porsche's share purchases caused a short squeeze in VW stock in October 2008, which briefly made it the largest automaker in the world by market cap; however, shares subsequently tumbled when Porsche was barred from taking control of the company. In the aftermath, Porsche was hurt by lawsuits and nearly 10 billion euros in acquisition related debt. In 2009, both companies agreed to a merger, which is not on the verge of being completed after VW's Wednesday stake purchase.

Volkswagen expects to consolidate Porsche's finances by Aug 1 and said that the sports car maker will be worth more than 20 billion euros, in a valuation that will create a non-cash accounting gain of more than 9 billion euros for its existing stake in the company. As part of the deal, VW said the merger will create 320 million euros in new synergies, adding to an initial forecast of roughly $1 billion in added annual operating profits. VW will also contribute financing to cash-strapped Porsche's operations.

"The unique Porsche brand will now become an integral part of the Volkswagen Group. That is good for Volkswagen, good for Porsche and good for Germany as an industrial location. Combining their operating business will make Volkswagen and Porsche even stronger - both financially and strategically - going forward," said Dr.Martin Winterkorn, chairman of Volkswagen, in a statement. The deal comes after the automaker found a structure that could shave off 1 billion euros in taxes. After its completion, Porsche SE will be the largest VW shareholder with 50.7% stake in the auto giant.

Morgan Stanley analyst Stuart Pearson said VW is getting a good deal, in a research note to clients that forecast a 6% earnings per share gain to VW after the merger. Recently, Porsche reported that its sales rose nearly 20% on a more than doubling of Boxter sales. With VW, Pearson also noted that Porsche will have access to added production capacity, potentially alleviating one of the company's biggest operational challenges. Bloomberg reports that VW makes more cars in a single day than Porsche does in a year.

VW's Porsche push mirrors Anheuser-Busch InBev's June buyout of Grupo Modelo, in a push to tap beer consumption in Central America and the export of its brands like Corona to international markets. After the acquisition, Anheuser-Busch InBev will own Corona, Pacifico, Brahma, Presidente, Quilmes, and Modelo branded beers in Latin America, putting it in stiff regional competition with Heineken, which owns Dos Equis, Tecate and Sol beers.

The combined company's beer making prowess draws in roughly $47 billion in annual revenue and has 150,000 employees spread across operations in 24 countries. "There is tremendous opportunity from combining two leading brand portfolios and further expanding Grupo Modelo's brands worldwide," said Carlos Brito, chief executive of Anheuser-Busch InBev, in a statement.

As part of the acquisition, Grupo Modelo will sell a 50% stake in Crown Imports, a distribution joint venture with Constellation Brands ( STZ) for $1.85 billion. Constellation Brands will own the joint venture outright after the deal. Those proceeds, and $2.7 billion in net cash that Grupo Modelo generates annually will help AB InBev earn $15.5 billion a year in cash, according to JPMorgan calculations.

On the heels of the deal, AB InBev shares rose nearly $78, pushing shares to new all-time highs. Year-to-date, the company's shares are up over 25%.

Like with Porsche and VW's long-time takeover bout, AB InBev and Grupo Modelo haven't always seen eye-to-eye on their long-time partnership.

AB InBev effectively gained a non- controlling 50% stake in Modelo when InBev bought Anheuser-Busch in 2008 for $52 billion, in the biggest-ever beer merger. At the time, Modelo tried to prevent Anheuser-Busch from selling its minority stake to InBev as part of the merger and even signaled it would look to buy back Anheuser- Busch's non-controlling stake in the Mexican beer brewer, which the Budweiser bought in the 1990s.

The decision for long-time partners like Volkswagen and Porsche to hitch up in multi-billion dollar deals comes at an interesting time for corporate decision makers. According to Dealogic data, corporate mergers have stalled in 2012, with deal volumes in the first half of the year hitting the lowest point since 2010. In the second quarter, deal volumes fell to the lowest point since the third quarter of 2009, when the global economy was just emerging from the biggest slowdown since the Great Depression.

In a survey of corporate executives, Ernst & Young recently noted that a 43% year-over-year fall in U.S. M&A volume in 2012 is likely founded on a new C-Suite focus on divestitures and returns of capital to shareholders as a lever of growth. That contrasts with the past decade when companies looked at deals as a key driver of growth.

" More executives are coming to realize that effective portfolio management and corresponding divestitures can be essential to growth," said Ernst & Young, citing the benefits of using sale proceeds to reinvest in a core business or expand into new products and regions.

Even with widespread expectations of asset sales, its actually stake acquisitions such as VW and AB InBev's recent deals that appear to be driving 2012 M&A. The largest deal of 2012 - commodity trader Glencore's over $40 billion acquisition of mining giant Xstrate is merely the purchase of a remaining stake in the company. Similarly, in Yahoo!'s ( YHOO) $7.1 billion stake sale of Alibaba - the second largest U.S. asset divestiture -- the Chinese e-commece giant is trying to take control of its outstanding shares.

-- Written by Antoine Gara in New York

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