friday, 1º february of 2013

U.S. sues to block Big Beer Merger


Antitrust

U.S. sues to block big beer merger

The U.S. government sued to block the world's biggest beer maker from spending $20 billion to get even bigger, the latest deal to fall prey to global antitrust regulators.

The surprise lawsuit seeks to block Bud Light maker Anheuser-Busch InBev NV's deal with the Mexican company that owns the Corona brand, and comes just a day after concession talks with the government broke down.

U.S. authorities said they want to prevent any overcharging by the global giants that dominate mass-market brews.

Defenders of the companies said U.S. consumers have plenty of choice. Belgium-based AB InBev said the government's action was "inconsistent with the law, the facts and the reality of the marketplace."

Beer specialists were divided on whether the merger could survive, with some speculating that AB InBev could relinquish further control over Corona sales in the U.S. to assuage concerns about pricing dominance.

The suit caused a sharp drop in shares of AB InBev and its would-be merger partner, Grupo Modelo SAB of Mexico. It hit shares of Constellation Brands Inc. even harder because the wine and spirits producer was set to expand as part of a side deal in the merger.

Regulators have taken a hard line on some recent deals. The Justice Department in 2011 forced AT&T Inc. to drop its acquisition of rival cellphone provider T-Mobile USA, while European regulators blocked the merger of Deutsche Börse AG and NYSE Euronext last year. In January, United Parcel Service Inc. abandoned its bid for Dutch delivery company TNT Express NV after European objections.

The U.S. beer industry is largely controlled by two big players: AB InBev, owner of Bud Light and Budweiser, and MillerCoors, maker of the Coors Light brand. Modelo, whose Corona is the best-selling imported beer in the U.S., runs a distant third, with 7% of U.S. beer sales, according to the Justice Department. Together, AB InBev and Modelo would control about 46% of U.S. sales.

The Justice Department's 27-page lawsuit, filed in a Washington, D.C., federal court, portrayed Modelo as an important competitor that puts pressure on AB InBev to maintain or lower prices, especially in California, New York, Texas and some other markets. AB InBev has complained in internal strategy documents about pressure from Modelo's pricing tactics, the department said.

The department said that when AB InBev raises beer prices, MillerCoors usually follows followed suit, while Modelo has been resistant. AB InBev internal documents "show that it is increasingly worried about the threat of high-end brands, such as Modelo's, constraining its ability to increase…pricing," the lawsuit said.

The lawsuit sets the stage for a major court fight unless the sides can find a way to resolve their differences. "We intend to vigorously contest the DOJ's action in federal court," AB InBev said. Grupo Modelo issued a comment echoing AB InBev.

Should the acquisition agreement fall apart as a result of the antitrust challenge, AB InBev may have to pay Modelo a $650 million breakup fee, according to the agreement struck in June.

Some industry watchers scoffed at the U.S. government's logic, saying supermarket shoppers and bar hoppers can choose from a wide variety of beers. "Are you going to tell me because they increase the price of Corona there aren't other beers you can buy as a substitute?" said Jeffrey Golman, vice chairman of Mesirow Financial and head of investment banking at the Chicago bank. "It seems like an overreach."

But Stephen Axinn, an antitrust lawyer with Axinn Veltrop & Harkrider LLP, said the government made a strong initial showing.

Defenders of the companies said U.S. consumers have plenty of choice. Belgium-based AB InBev said the government's action was "inconsistent with the law, the facts and the reality of the marketplace."

Beer specialists were divided on whether the merger could survive, with some speculating that AB InBev could relinquish further control over Corona sales in the U.S. to assuage concerns about pricing dominance.

The suit caused a sharp drop in shares of AB InBev and its would-be merger partner, Grupo Modelo SAB of Mexico. It hit shares of Constellation Brands Inc. even harder because the wine and spirits producer was set to expand as part of a side deal in the merger.

Regulators have taken a hard line on some recent deals. The Justice Department in 2011 forced AT&T Inc. to drop its acquisition of rival cellphone provider T-Mobile USA, while European regulators blocked the merger of Deutsche Börse AG and NYSE Euronext last year. In January, United Parcel Service Inc. abandoned its bid for Dutch delivery company TNT Express NV after European objections.

The U.S. beer industry is largely controlled by two big players: AB InBev, owner of Bud Light and Budweiser, and MillerCoors, maker of the Coors Light brand. Modelo, whose Corona is the best-selling imported beer in the U.S., runs a distant third, with 7% of U.S. beer sales, according to the Justice Department. Together, AB InBev and Modelo would control about 46% of U.S. sales.

The Justice Department's 27-page lawsuit, filed in a Washington, D.C., federal court, portrayed Modelo as an important competitor that puts pressure on AB InBev to maintain or lower prices, especially in California, New York, Texas and some other markets. AB InBev has complained in internal strategy documents about pressure from Modelo's pricing tactics, the department said.

The department said that when AB InBev raises beer prices, MillerCoors usually follows followed suit, while Modelo has been resistant. AB InBev internal documents "show that it is increasingly worried about the threat of high-end brands, such as Modelo's, constraining its ability to increase…pricing," the lawsuit said.

The lawsuit sets the stage for a major court fight unless the sides can find a way to resolve their differences. "We intend to vigorously contest the DOJ's action in federal court," AB InBev said. Grupo Modelo issued a comment echoing AB InBev.

Should the acquisition agreement fall apart as a result of the antitrust challenge, AB InBev may have to pay Modelo a $650 million breakup fee, according to the agreement struck in June.

Some industry watchers scoffed at the U.S. government's logic, saying supermarket shoppers and bar hoppers can choose from a wide variety of beers. "Are you going to tell me because they increase the price of Corona there aren't other beers you can buy as a substitute?" said Jeffrey Golman, vice chairman of Mesirow Financial and head of investment banking at the Chicago bank. "It seems like an overreach."

But Stephen Axinn, an antitrust lawyer with Axinn Veltrop & Harkrider LLP, said the government made a strong initial showing.

Some beer-market watchers said AB InBev could offer additional concessions, perhaps giving up or restructuring its 10-year option to buy the U.S. rights for all Modelo brands from Constellation's Crown subsidiary.

"If they would make that clause go away, it would give Crown more stability," said Joe Thompson, president of Independent Beverage Group in Hilton Head, S.C. "You could have a very viable competitor, even a third major U.S. supplier."

He said AB InBev could also be pushed to sell a big brewery to Crown to give it production capacity.

Others said a settlement may be hard to come by, especially given that earlier negotiations faltered.

"There is no simple solution and this is for a lot of marbles," said Benj Steinman, publisher of Beer Marketer's Insights, a trade publication. "You've seen a lot of speculation on concessions, everything from breweries to brand, but it's not clear what parameters [DOJ] would even consider."

(Published by WSJ - January 31, 2013)

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