Anheuser sees profit up, Modelo seeks arbitration

NEW YORK (Reuters) - Brewer Anheuser-Busch Cos Inc previewed strong third-quarter results and told investors that partner Grupo MODELO (XGMD.MC) will seek arbitration over Anheuser's proposed takeover by InBev , a move that could possibly disrupt the deal.

The maker of Budweiser and Michelob said on Friday it expects pretax income for the third quarter, ended September 30, to rise at a low double-digit rate, helped by price increases and its new Bud Light Lime.

The company also said that U.S. quarterly beer sales by volume rose 2.3 percent, helped by the Bud Light Lime launch. Beer sales from wholesalers to retailers, a better indicator of consumer demand, rose 3.6 percent.

"The results have a bitter irony to them, in our view, in that they are some of the best metrics posted this decade," wrote Stifel Nicolaus analyst Mark Swartzberg in a research note. "For example, quarterly sales-to-retailers have not been this strong since 2000."

Anheuser-Busch agreed in July to a sweetened $52 billion takeover by Belgium's InBev, maker of Stella Artois and Beck's, to create the world's largest brewer and end roughly 150 years of independence for the St. Louis-based company.

As the nation's top brewer, Anheuser has struggled with a shift in consumer tastes away from domestic beer toward wine, spirits, foreign beers and small-batch "craft" beers, and a weakening economy.

Its focus on the domestic market left it vulnerable to a takeover, analysts have said, since many of its rivals combined and grew bigger.

Anheuser shareholders still have to vote on the InBev deal, which is expected to close by the end of the year.

But with the biggest financial crisis since the Great Depression slamming the brakes on credit in recent weeks, some analysts have questioned the fate of the deal because InBev is relying on several European banks for funding.

LAST CALL FOR MODELO?

Another potential roadblock is Mexico's Modelo, which is half-owned by Anheuser and has yet to give its blessing to the deal. In July, the brewer of Corona said its relationship with Anheuser gave it contractual rights to choose whether it would ally with InBev.

Modelo sent Anheuser a letter saying it would file for arbitration regarding its claim that Anheuser would violate their contract if the InBev deal was consummated without Modelo's consent, Anheuser said in a filing on Friday.

A Modelo spokeswoman confirmed the letter was sent but declined to comment further.

Anheuser said it believes Modelo's claims are entirely without merit and that the arbitration proceeding will have no impact on closing the InBev deal.

In a research note titled "Last call for Modelo?" Credit Suisse analyst Tufic Salem said Modelo's action suggested it had no grounds to influence the InBev deal, and that the move to arbitration could backfire.

"Our understanding of the Modelo-AB contract gives no change-of-control right of refusal to Modelo, and outcome of arbitration may force Modelo to tender remaining ownership at a discount," he wrote.

Arbitration will give a clear timeline for a decision on Modelo's future, possibly up to two years, Salem said. That would give InBev time to close the Anheuser deal, sell its theme park and packaging assets to improve its debt position, and be able to take over Modelo toward early 2010, he said.

Spokeswomen for Anheuser-Busch and InBev were not immediately available.

Over the last two weeks Anheuser shares have traded well below the takeover price of $70 per share, indicating doubts in the market about the deal going through.

Morningstar analyst Ann Gilpin recently raised the uncertainty rating around her fair value estimate for Anheuser-Busch due to the current credit environment.

"At this point, we think the deal is likely to go through, but with new uncertainties unfolding almost every day, we think it is important to be cautious," Gilpin wrote on Monday.

In a research note on Friday, Barclays Capital said it appeared that the merger remains on track to close, and said the spread between Anheuser's current share price and the deal price is "probably indicative of general market dislocation as opposed to significant deal risk."

InBev shares fell 4 percent to 40 euros, while Anheuser shares rose 52 cents to close at $65.10 on the New York Stock Exchange.

(Reporting by Martinne Geller; Editing by Brian Moss, Steve Orlofsky and Bernard Orr)

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