Grupo Modelo Sues Constellation Over Corona Marketing

Brewer Claims Partner Not Paying Fair Share in U.S.

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CHICAGO ( -- The two companies that jointly market Corona beer in the U.S. are headed to court in a dispute over marketing funds.

Corona brewer Grupo Modelo sued New York-based Constellation Brands late yesterday, alleging the wine-and-spirits giant wasn't paying its fair share of the brand's U.S. marketing budget. The two companies formed Crown Imports to market Corona, Modelo Especial and Pacifico in the U.S. in 2007 via a 10-year agreement.

The suit comes as Corona is wrapping up its third consecutive year of sales declines amid a tough environment for pricey import beers. The brand had posted 16 years of uninterrupted growth before its recent slump.

Constellation, Modelo alleges, is "obstructing Crown's business in order to further their own selfish goals." Modelo's suit also alleged that Constellation was attempting to hold marketing funds "hostage" in a manner that would hurt Modelo's business and force it to renegotiate the terms of the joint venture. The central point of contention involves Crown's 2010 marketing budget. According to the complaint, Crown executives strongly advocated for keeping marketing spending even with 2009, and argued that any cuts would have negative consequences for the brands. Modelo agreed.

The suit says Constellation executives on Crown's board agreed but "explicitly linked approval of management's recommended business plan with proposals for restructuring the joint venture ... and insisted that they would not approve management's plan unless [Modelo] alone contributed the additional [redacted] needed to support the level of marketing expenditures that all parties agreed to be in Crown's best interests."'

Constellation, in a press release, said it hadn't yet been served with the complaint, but that Modelo's claims were without merit.

"At issue is the funding by the partners for incremental Crown promotion and marketing spending for calendar year 2010," Constellation wrote. "Previously, the incremental spending in question was provided by [Modelo] and was agreed upon once again for the 2010 business plan."

Reacting to the suit, UBS analyst Kaumil Gajrawala said in an e-mail he believed the suit "could be a strategic move by Modelo to attempt to get out of the Crown [joint venture] before the end of 2016 [when it is scheduled to expire]." If that transpired, it could be a blow to Crown's primary creative agency, Cramer-Krasselt, and its media buying and planning shop, Horizon Media.

It also has potentially major ramifications for Constellation, the world's largest wine marketer, which derives more than 40% of its earnings before interest and taxes from its equity stake in Crown.

Mark Swartzberg, an analyst with Stifel Nicolaus, cited the suit as his reason for cutting the rating on Constellation's shares to hold from buy this morning.

Wall Street apparently agrees: Constellation's stock price declined more than 5% in heavy trading this morning.

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