Anheuser-Busch InBev NV (ABI) may have to give up more control of U.S. beer distribution or even sell a brewery to settle an antitrust lawsuit by the U.S. to block its $20.1 billion takeover of the rest of Grupo Modelo SAB. (GMODELOC)
AB InBev, the world’s biggest brewer, and U.S. regulators are proceeding with talks on the Justice Department’s objections to the deal, according to people familiar with the matter. The Leuven, Belgium-based maker of Budweiser must decide whether to give more concessions to the government, fight the lawsuit in court, or walk away from the transaction, said Herbert Hovenkamp, who teaches antitrust law at the University of Iowa.
“It’s a tiny percentage that go to trial,” Hovenkamp said. “More often than not, the parties identify some assets that can be spun off.”
Shares of AB InBev, which controls almost half the U.S. beer market, and Modelo, Mexico’s biggest brewer, plunged after the Justice Department filed its complaint yesterday in federal court in Washington. The government argued the transaction violates antitrust law because it would eliminate the “substantial head-to-head competition” between the companies and “diminish ABI’s incentive to innovate.”
The department acted yesterday as a deadline was looming to end its investigation and because the suit allows the government to keep its options open, according to a person familiar with the matter, who asked not to be identified because the process is private. The parties haven’t fallen into intractably hostile camps, that person said.
The complaint is the latest in a series of challenges to deals laid out by regulators. AT&T Inc. abandoned a $39 billion bid to buy Deutsche Telekom AG’s T-Mobile USA in December 2011 after opposition from the Justice Department, while more recently European regulators blocked Deutsche Boerse AG’s purchase of NYSE Euronext and United Parcel Service Inc.’ 5.16 billion-euro ($7.1 billion) bid for TNT Express NV.
Bill Baer, head of the department’s antitrust unit, said AB InBev’s proposal to sell Modelo’s stake in Crown Imports LLC, a U.S. distributor Modelo owns jointly with Constellation Brands Inc. (STZ:US), fell “far short” of protecting consumers.
“Even with this fix, ABI would still control Modelo’s brand and its brewing and bottling assets,” Baer said yesterday on a conference call. The U.S. would seek an injunction to block the deal formally, pending any trial, he said.
Potential remedies AB InBev is considering include removing the 10-year call option on Crown Imports, said a person familiar with the company’s thinking. The brewer also plans to argue that the U.S. beer market is already sufficiently competitive and that a deal can in theory be done, the person said.
AB InBev rose 4.1 percent to 66.54 euros at 4:17 p.m. in Brussels trading, regaining some of yesterday’s 7.8 percent drop. Grupo Modelo rose 0.6 percent to 108.85 pesos in Mexico City today after falling 6.8 percent yesterday.
Constellation rose 2.4 percent to $33.15 in New York after plunging 17 percent yesterday, the biggest daily decline since September 1996. Before yesterday, the Victor, New York-based company’s shares had risen 80 percent since June 28, the day before the Modelo deal was announced.
Negotiations before the Justice Department filing centered on how to structure a long-term supply and pricing agreement for importing Modelo’s brands to the U.S., three people familiar with the matter said Jan. 15. The talks subsequently broadened to include production assets, one of the people said.
AB InBev was unwilling to sell Modelo’s newest state-of- the-art beer bottling plant, located near Piedras Negras, Mexico, as a concession to win approval, two people familiar with the matter said last month. Selling the plant would take the supply of Corona in the U.S. out of AB InBev’s hands, reducing the likelihood the brewer could control Corona prices.
Any requirement to sell the brewery would be a dealbreaker, said the people at the time, asking not to be named because the matter wasn’t public.
The proposed transaction between AB InBev and Modelo would marry Bud Light, the top-selling U.S. brand, with Corona, the biggest import, and create a combined company with estimated revenue of about $47 billion this year.
“We continue to believe some compromise between the parties will ultimately be found as we believe some remedies do exist and the strategic merits of the deal are too compelling for ABI to walk away outright,” Dirk Van Vlaanderen, an analyst at Jefferies International in London, said in a note today. “A solution will, however, take time.”
AB InBev said in a statement it no longer expects the deal to close in first quarter of 2013.
The Justice Department’s action is “inconsistent with the law, the facts and the reality of the marketplace,” the company said. “We remain confident in our position, and we intend to vigorously contest the DOJ’s action in federal court.”
AB InBev agreed to buy the 50 percent of Modelo it didn’t own in June, seeking to increase its penetration of emerging markets. Beer sales are rising at a faster pace in Mexico than in developed economies such as the U.S., the world’s second- biggest beer market by volume after China.
AB InBev, which had 47 percent of the U.S. beer market in 2011, according to analysis of Nielsen data by Sanford C. Bernstein & Co., expects the combined company to deliver cost and revenue benefits of at least $600 million annually. The takeover is aimed at extending AB InBev’s lead as the world’s biggest brewer over No. 2 SABMiller Plc. (SAB) The companies, if combined, would have produced 490 million hectoliters of beer in 2011, compared with SABMiller’s 234 million, AB InBev said.
Modelo controls about 60 percent of Mexico’s beer market with brands including Modelo Especial, Negra Modelo, Pacifico and Victoria. Heineken NV (HEIA) accounts for almost all of the rest with brands such as Dos Equis and Tecate. Mexico’s antitrust regulator approved the transaction in November.
“If ABI fully owned and controlled Modelo, ABI would be able to increase beer prices to American consumers,” Baer said. “This lawsuit seeks to prevent ABI from eliminating Modelo as an important competitive force in the beer industry.”
Americans spent at least $80 billion on beer last year, the department said.
“ABI internal documents acknowledge that Modelo has put ‘increasing pressure’ on ABI by pursuing a competitive strategy directly at odds with ABI’s well-established practice of leading prices upward,” according to the complaint.
AB InBev uses its market dominance to coordinate beer prices with competitors such as SABMiller, the department said in the lawsuit. It does this by “purposefully making its price increases transparent to the market so its competitors will get in line,” according to the complaint.
The Belgian brewer’s U.S. pricing strategy is governed by what the company termed a “Conduct Plan” that “reads like a how-to manual for successful price coordination,” the department alleged.
AB InBev and SABMiller “have been forced to offer lower prices and discounts for their brands to discourage consumers” from buying Modelo brands, the department said.
Constellation agreed to pay $1.85 billion for Modelo’s stake in Crown Imports, the joint venture for U.S. distribution owned by the two companies. That deal, which would give Constellation the exclusive right to import Modelo beer into the U.S. for 10 years, is contingent upon AB InBev buying Modelo.
The lawsuit alleges the Constellation deal was aimed at winning regulatory approval by “creating a facade of competition” between AB InBev and its importer.
Constellation “would acquire no Modelo brands or brewing facilities under this arrangement -- it remains simply an importer, required to depend on ABI for its supply of Modelo- branded beer,” the department said in the complaint.
Constellation’s participation in the Crown joint venture shows “that it does not share Modelo’s incentive to thwart ABI’s price leadership,” according to the department.
Constellation said in a statement today that “the DOJ’s action demonstrates its incomplete understanding of the proposed transaction.” Crown Imports is AB InBev’s primary competitor in the U.S., not Modelo, Constellation said. Also, the company’s full ownership of Crown will improve competition and give Crown “greater flexibility in responding to competitive factors in each of its markets,” Constellation said.
“It’s possible they’ve done an aggressive complaint to push the parties into settling, but the way they’ve written it will make it harder to settle for both sides,” said Allen Grunes, an antitrust lawyer with Brownstein Hyatt Farber Schreck LLP in Washington who isn’t involved in the case. “This looks more like it’s going to court.”
The case is U.S. v. Anheuser-Busch InBev SA/NV, 13- cv-00127, U.S. District Court, District of Columbia (Washington).
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