STZ Constellation Brands Inc

By Santiago Pérez 

MEXICO CITY -- The fate of a $1.4 billion brewery under construction in northern Mexico by Constellation Brands Inc. will be determined by voters in the border city of Mexicali this weekend, sparking investor concern about rising legal uncertainty under President Andrés Manuel López Obrador.

Companies are closely following the referendum on the plant, which will provide 750 jobs and is crucial to the expansion of Constellation, the third-largest U.S. beer producer and brewer of Mexico's Corona and Modelo brands for U.S. consumers.

Putting big private investment projects to public referendums could further disrupt foreign investment at a time when Mexico's economy faces headwinds from Mr. López Obrador's nationalist energy policies as well as the new coronavirus. Foreign direct investment in Mexico fell 5.2% last year compared with 2018, according to the government's preliminary numbers, while the economy shrank by 0.1%.

The company began construction on the site in 2016 and plans to finish the plant next year. It says it has already spent some $900 million on the nearly completed brewery.

Local farmers have long complained that Constellation's water-intensive plant will strain the aquifer in a parched region where farmers have already pulled tens of thousands of acres out of production because of water shortages unrelated to the brewery construction.

"That water will now go to the U.S. in beer cans," said Rigoberto Campos, a local farmer and coordinator of the Committee to Defend Baja California's Water, which represents 14,000 farmers who rely on irrigation systems in the Mexicali Valley.

Constellation Brands officials say the completed brewery will only use 0.3% of the water available for the Mexicali Valley. They point out that the project is in full compliance with local rules, regulations and laws.

Rodrigo Llantada, head of the Mexicali chapter of the Business Coordinating Council, the country's top employer confederation, said the government is using public consultations to roll out public policy instead of regulating and managing water use and investment projects.

"This has the clear intention to set a precedent that's concerning and regrettable," he said. "And it goes beyond Constellation's plant, since it puts economic and labor development at risk."

Federal authorities plan to open around 30 polling stations in Mexicali on the weekend, even as infections with the new coronavirus are rising steadily in the country. Government workers will assist Mexicali voters with face masks, swipes and sanitizer gel, and residents are being encouraged to use their own pens.

Referendums have become a favorite tool of Mr. López Obrador, a former Mexico City mayor. Even before taking office in late 2018, he organized a referendum on a partially completed $13 billion new Mexico City airport, a project begun by his predecessor. Only 1.2% of registered voters turned out. But the project was canceled after 70% of those who participated rejected it. The move has slowed investment by both foreign and Mexican companies.

Late last year, his government organized a referendum in the Yucatán Peninsula on the development of the proposed Maya Train, a $7.4 billion, 950-mile tourist railway through Mexico's largest rainforest. More than 92% of those who participated voted in favor.

In the case of the Mexicali brewery, Mr. López Obrador said that environmental authorities recommended a public consultation.

"There have been a lot of pressures, of all kinds, from businessmen and even financiers who say they are concerned that we are going to carry out this exercise. We want the citizens to decide, so that it is the mandate of the people," Mr. López Obrador said earlier this month.

Voters are being asked whether to continue with the construction of the brewer or to cancel the project. Mr. López Obrador, who hasn't publicly declared his position on the brewery, is expected to comment on the results on Monday.

More than half of Constellation's 9,000 workers are based in Mexico, where the company has invested more than $9 billion over the past six years, becoming one of Mexico's top foreign investors. Constellation says it wants to keep making its Mexican brands in Mexico but would look elsewhere if it can't expand in the country.

"The company no longer has the time to embark on a public consultation in which its future in Mexico remains uncertain," Daniel Baima, the chairman of Constellation Brands Mexico, wrote in a letter to Mr. López Obrador early this month.

Mr. López Obrador has acknowledged that jobs are at stake. "From an investment perspective, halting the plant can lead to mistrust of our country," he said. "But on the other hand, we cannot run out of water. Economic growth can't be put above the well-being of the people, water is essential."

Mexicali's export manufacturing industry employs 70,000 jobs. In recent years, dozens of foreign firms such as Mitsubishi Motors Corp., Coca-Cola Co. and Honeywell International Inc. have set up shop in the arid city 120 miles from San Diego.

Mexico is also a global titan when it comes to beer. It is the world's largest beer exporter, generating some $4 billion in sales of internationally acclaimed brands such as Corona or Dos Equis. The country is the top source of imported beer in the U.S., beating out Dutch and Belgian exporters, with more than a 70% market share, according to estimates from the Beer Institute, a Washington, D.C.-based industry group.

Some $20 billion has been invested in the past decade in construction and expansion of Mexican breweries and their suppliers, according to government estimates. Constellation runs one of the world's largest breweries in Coahuila state, just across the border from Eagle Pass, Texas. As a result of free-trade deals in North America, a railway line directly connects the plant with U.S. supplies of malt grains, and the company then ships the beer north.

Write to Santiago Pérez at santiago.perez@wsj.com

(END) Dow Jones Newswires

March 20, 2020 16:12 ET (20:12 GMT)

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