Anheuser-Busch InBev NV (ABI) and the U.S. said they are in talks to resolve the government’s lawsuit to block the brewer’s purchase of Grupo Modelo SAB and asked to suspend the litigation until March 19.
In a joint court filing, AB InBev and the Justice Department said the government is looking at whether a revised plan to sell control of all Modelo brands in the U.S., and a brewery in Mexico, to Constellation Brands Inc. (STZ:US) would allay antitrust concerns. A break in the proceedings “would be beneficial” for a potential resolution, according to the request filed yesterday with a federal judge in Washington.
Evaluating the revised proposal “will require some market testing,” said Bert Foer, president of the American Antitrust Institute in Washington, a group favoring vigorous enforcement of antitrust laws. The government must determine whether Constellation “has what it takes to transform itself from a non-brewer into a brewer and provide at least as much competition against a tough duopoly as the status quo.”
Yesterday’s filing comes the day before AB InBev was required to respond to the government’s lawsuit. The parties offered to update U.S. District Judge Richard Roberts by March 19 on efforts to settle the case. If the matter can’t be resolved, they will propose a scheduling order for bringing the case to trial, according to the filing.
AB InBev’s shares traded 0.8 percent lower to 69.30 euros in Brussels. Modelo’s shares rose 1.1 percent to 114.75 pesos at 1:48 p.m. in Mexico City, the highest intraday level since Jan. 31. Constellation shares climbed 3.2 percent to $43.15 in New York trading.
“We see this as positive,” Melissa Earlam, an analyst at UBS AG in London, said today. “It feels like there’s constructive negotiation going on between the DOJ and AB InBev.”
The parties and the Justice Department are cooperating to try to resolve the competitive concerns raised by the transaction, three people familiar with the discussions said. The companies are providing information, including access to documents and executives, as the department conducts a full review of the revised deal proposal, the people said.
While the tone of the discussions is positive for a settlement, it’s still early in the process and the outcome isn’t guaranteed, said two of the people, who asked not to be identified because the talks aren’t public.
The revised deal, submitted on Feb. 14, is aimed at appeasing U.S. authorities, who sued to block AB InBev’s proposed $20.1 billion purchase of the rest of Mexico City-based Modelo, arguing the merger would hurt competition and lead to higher prices. AB InBev, the world’s biggest brewer, controls almost half the U.S. beer market, while Corona is the country’s biggest imported brand.
Constellation, based in Victor, New York, issued a statement saying it can’t be assured discussions with the Justice Department will succeed in persuading the government to clear the deal. AB InBev and Modelo issued similar comments.
Under the revised deal, Constellation will gain Modelo’s brewery in Piedras Negras, near the Texas border in Mexico, and perpetual rights for the Corona and Modelo brands in the U.S.
The sale to Constellation addresses “all of the concerns” presented by the government, AB InBev said when announcing the new proposal. AB InBev had earlier agreed to sell Modelo’s 50 percent stake in Crown Imports LLC to Constellation for $1.85 billion.
Constellation and Crown asked Roberts for permission to intervene in the case arguing the department’s action “fundamentally threatens Constellation’s future in the beer business.” Roberts hasn’t ruled on that request and yesterday’s filing says the two companies agreed to the monthlong suspension of the case.
AB InBev agreed to buy the 50 percent of Modelo it didn’t own in June 2012, 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.
The Justice Department in its lawsuit said the original transaction violates antitrust law because it would eliminate the “substantial head-to-head competition” between AB InBev and Modelo and “diminish ABI’s incentive to innovate.”
The Justice Department alleges the initial proposal for Constellation to take full control of U.S. distribution of Modelo brands was aimed at winning regulatory approval by “creating a facade of competition” between AB InBev and its importer.
The department said Constellation “has already shown through its participation in the Crown joint venture that it does not share Modelo’s incentive to thwart ABI’s price leadership.”
The case is U.S. v. Anheuser-Busch InBev NV, 13-cv-00127, U.S. District Court, District of Columbia (Washington).
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