Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Justice Department, Anheuser-Busch InBev, and Grupo Modelo Agree to Stay, Continue Discussions of Proposed Beer Merger, (Feb 21, 2013)

By Tobias J. Gillett, J.D., LLM.

The Department of Justice Antitrust Division, Anheuser-Busch InBev (ABI), and Grupo Modelo have agreed to a stay of proceedings until March 19, 2013 in the Justice Department’s civil suit against the beer companies. The stay will provide time for the Justice Department to review ABI and Modelo’s latest proposal to resolve the Justice Department’s concerns regarding ABI’s acquisition of the 50 percent of Modelo that it does not already own.

On January 31, 2013, the Department of Justice Antitrust Division filed a civil antitrust complaint in the federal district court in Washington, D.C. challenging ABI’s proposed acquisition of total ownership and control of Corona brewer Grupo Modelo (U.S. v. Anheuser-Busch InBEV SA/NV, Case No. 1:13-cv-00127, January 31, 2013). The Justice Dapartment contended that the $20.1 billion transaction would substantially lessen competition in the market for beer in the United States as a whole and in 26 metropolitan areas across the United States, causing consumers to pay more for beer and resulting in fewer new products from which they could choose.

ABI is currently the largest beer firm in the United States, and Modelo is the third-largest, with the companies together controlling about 46 percent of annual sales. According to the Justice Department, ABI generally acts as the market’s price leader, implementing annual increases in the sub-premium, premium, and premium plus segments of the U.S. beer industry. Modelo, through aggressive pricing, puts pressure on ABI to maintain or lower prices, particularly in certain parts of the country, the Department asserted.

ABI and Modelo initially sought to resolve the Justice Department’s concerns through an agreement under which Modelo’s existing 50 percent interest in Crown Imports LLC—Modelo’s exclusive U.S. importer—would be sold to its Crown joint venture partner, Constellation Brands, Inc. for $1.85 billion. ABI would also enter into an exclusive agreement to supply Constellation with Modelo beer to import into the United States. ABI could terminate this supply agreement after 10 years and would retain the Modelo brands and its brewing and bottling facilities.

The Justice Department considered this solution inadequate. The Justice Department’s complaint stated that the combined effect of the proposed acquisition of Modelo and the proposed fix would be to eliminate from the marketplace a sophisticated brewing firm with a long history of success and replace it with an importer which would own no brands and would be totally dependent on ABI for its supply of Corona and other Modelo brands.

Under the most recent proposal by ABI and Modelo, announced February 14, 2013, ABI would transfer perpetual rights in Corona and other Modelo brands in the United States and ownership of Compañía Cervecera de Coahuila, Modelo’s brewery in Piedras Negras, Mexico, to Constellation in exchange for $2.9 billion. Constellation would still acquire ABI’s 50 percent stake in Crown, resulting in a total purchase price of approximately $4.75 billion. ABI and Constellation have also agreed to a three-year transition services agreement.

When combined with Constellation’s announced plans to invest $400 million in expansion of the Piedras Negras facility to permit it to produce 100 percent of Crown’s beer needs, the transaction would establish Crown as the third largest producer and marketer of beer in the United States. The companies’ plan would create a fully independent entity capable of competing with ABI, and would resolve the Justice Department’s concerns, ABI, Modelo, and Constellation have asserted.

“The AB InBev and Grupo Modelo transaction has always been about Mexico and making Corona more global in all markets other than the U.S., where the brands will be owned and managed by Constellation,” Carlos Brito, Chief Executive Officer of ABI, stated. “We are pleased to have reached this revised agreement that preserves the merits of the Grupo Modelo transaction while allowing us to move expeditiously to the Modelo integration process and the capture of approximately USD 1 billion of synergies, up from our original estimate of USD 600 million.”

“The revised agreement with AB InBev will make Constellation’s Crown beer division a fully independent competitor and the third largest producer and marketer in the U.S. beer industry,” Rob Sands, President and Chief Executive Officer of Constellation Brands, said. “This is a transformational acquisition for our company as we will hold perpetual rights to Corona and the Modelo brands distributed by Crown in the U.S. We will have autonomous control of production, distribution, marketing and promotion of these brands in the U.S.”

In a motion filed February 8, 2013, Constellation and Crown sought to intervene as defendants in the Justice Department’s action. Constellation contended that the Department’s efforts to enjoin ABI’s acquisition of Modelo shares fundamentally threatened Constellation’s future in the beer business. Constellation and Crown argued that “an injunction would prevent Crown from achieving the benefits of an improved supply agreement that would enhance its competitive position.”

Attorneys: Mary Strimel for United States Department of Justice. Steven C. Sunshine (Skadden, Arps, Slate, Meagher & Flom LLP) for Anheuser-Busch InBev SA/NV. Yonatan Even (Cravath, Swain & Moore LLP) for Grupo Modelo S.A.B. de C.V. Margaret H. Warner (McDermott, Will & Emery LLP) for Constellation Brands, Inc.

Companies: Constellation Brands, Inc.; Crown Imports LLC; Anheuser-Busch InBev SA/NV; Grupo Modelo S.A.B. de C.V.

News: Antitrust AntitrustDivisionNews