With the U.S. government standing in its way, can the King of Beers rescue its $20 billion deal to buy Mexico's largest brewer?
The Justice Department sued Thursday to block Anheuser-Busch InBev's plan to buy full control of Grupo Modelo, maker of Corona beer. The government claims that the deal would drive up beer prices and stifle innovation.
A-B InBev's options now include fighting it out in court, negotiating a settlement or walking away from the deal.
Analysts and legal experts say all three options are on the table. Some believe that the government's case may be tough to prove and that A-B InBev could win in court.
The Justice Department argues that the brewer's pending deal to buy the half of Modelo it doesn't already own violates the Clayton Act, passed in 1914 to block mergers and acquisitions that lessen competition.
Though A-B InBev already owns half of Modelo, the Mexican brewer structured the ownership stake in a way that allowed Modelo to remain independent.
Increased concentration in the beer industry was a driver behind the Justice Department's decision to sue. Five years ago, Belgium-based InBev bought St. Louis-based Anheuser-Busch, while SABMiller PLC and Molson Coors Brewing Co. combined their U.S. and Puerto Rican operations.
"The beer market worldwide has been consolidating in the last few years ... and the government is concerned about it," said Michael Jacobs, an antitrust professor at DePaul University in Chicago. "It's not just the U.S., but in China, the U.K. and everywhere else."
The U.S. government contends that merging A-B and Modelo would remove a key competitor. Modelo followed a pricing strategy that kept prices lower for consumers by putting competitive pressure on A-B and MillerCoors, according to the lawsuit filed Thursday in Washington.
Antitrust guidelines prohibit mergers or acquisitions that eliminate such a maverick, said Herbert Hovenkamp, an antitrust professor at the University of Iowa.
"The theory the government is bringing it under is the maverick pricing strategy where you have a firm in the market that's disruptive -- it gets others to cut prices and come out with new products," Hovenkamp said. "The social value of a maverick is that it allows a market to act more competitively. If the government can show that, then I think they have a fairly solid theory here."
When the acquisition was announced in June, A-B InBev offered a concession designed to assuage antitrust worries.
The brewer would sell Modelo's 50 percent share in Crown Imports, which sells Modelo products in the U.S., to Constellation Brands, which owns the other half of Crown. As part of the deal, Constellation would get exclusive U.S. rights to Modelo for 10 years.
The government says that proposal wasn't enough.
A-B InBev says it intends to vigorously contest the Justice Department's action.
Analysts speculate, though, that the brewer could seek to negotiate a settlement to stave off a lengthy and unpredictable court battle.
On Thursday, the government's top antitrust lawyer, assistant attorney general Bill Baer, left open the possibility that the government could reach a settlement with A-B InBev and Modelo before it gets to court.
"It is likely that the DOJ and A-B InBev discussed potential remedies in the weeks leading up (to the) filing, and discussions are probably continuing," Bernstein Research senior analyst Trevor Stirling wrote in a research note Friday. "Notwithstanding their initially bullish stance, it is possible that ABI will publicly or privately offer further remedies."
Selling U.S. brands is an unlikely possibility, Stirling wrote, because it would do little to satisfy the government's concerns about pricing.
More likely scenarios, according to analysts, include A-B InBev agreeing to sell Modelo's Piedras Negras brewery in Mexico or selling its beer wholesalers in the U.S.
A-B InBev owns its own wholesale businesses in several places where it's legal for breweries to do so, including Boston, San Diego and Denver. Selling one or more of those is a possibility, especially in areas where the merger would increase A-B InBev's market share beyond levels the government thinks are healthy for competition.
The government also could restrict incentives the brewer offers to non-company-owned wholesalers. Incentives sometimes are used to limit which beers the independents carry.
The Justice Department suit is the first litigation Baer has pursued since he was confirmed by the Senate as the government's top antitrust lawyer in late December.
If the latest case goes forward, Baer will be up against a cadre of lawyers who are well versed in antitrust law. Sharis Pozen, a partner at law firm Skadden, Arps, Slate, Meagher & Flom, which is representing A-B in the suit, was acting assistant attorney general in the antitrust division until April 2012.
Modelo's legal team includes Christine Varney, a partner and chair of the antitrust practice at law firm Cravath, Swaine & Moore. Varney is both a former U.S. assistant attorney general for antitrust and a former commissioner of the Federal Trade Commission.
Glenn MacDonald, an economics professor at the Olin Business School at Washington University, said he thinks A-B InBev's offer to sell the import rights to Modelo is enough to comply with antitrust law.
"The proposition is very reasonable, and I think they'll beat (the Justice Department) in court," he said.
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OCTOBER 31, 2014
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