The Department of Justice ("DOJ") has filed a civil
antitrust lawsuit challenging the $20 billion proposed acquisition
by Anheuser-Bush InBev ("ABI") of the remaining 50
percent interest in Grupo Modelo S.A.B. de C.V.
("Modelo"), the producer of Corona Extra, the
best-selling imported beer in the United States. The lawsuit
alleges that the transaction would not only eliminate head-to-head
competition, resulting in increased prices and less innovation, but
also would remove Modelo as a disruptive pricing influence in the
overall marketplace. The DOJ rejected ABI's attempt to resolve
the DOJ's concerns through a voluntary supply agreement, which
would have allowed Modelo's existing joint venture partner in
the U.S., Constellation, to gain exclusive control over the import
of Modelo beer into the United States for a period of at least ten
years.
ABI is the largest brewer in the United States and owns more than
200 beer brands, including the number one domestic brand (Bud
Light). Modelo is the third largest brewer in the country and
owns several brands, including Corona Extra, the top-selling U.S.
import. The DOJ complaint states that together ABI and
Modelo control about 46 percent of annual beer sales in the United
States, as reflected in graph below.
The complaint also states that the proposed acquisition would
substantially lessen competition in the market for beer in 26
metropolitan statistical areas ("MSAs") and also on a
national basis. In addition to combined national shares of
about 46 percent, the parties would have between 34 and 64
percent of annual sales in the 26 relevant MSAs.
The DOJ also alleged that head-to-head competition between ABI and
Modelo has resulted not only in lower prices, but also increased
innovation. The complaint states that ABI introduced Bud
Light Lime in a clear bottle to mimic Corona and that it had once
considered launching a new line, "Michelob Especial" to
compete with "Modelo Especial." The other examples
of "innovation" in the beer industry were plans to
acquire beers that would appeal to consumers currently buying
Mexican imports.
Modelo's share is relatively low for a merger challenge based
on the theory that the postmerger company alone can cause price
increases ("unilateral effects"). But the DOJ
complaint's allegations suggest the government's theory is
that, after the transaction, the market's suppliers will find
it easier tacitly to coordinate their competition
("coordinated effects"). The complaint highlights
Modelo's history as a disruptive price competitor, one that
chose not to follow ABI's annual and "transparent"
price increases.
The DOJ's complaint makes numerous references to the
parties' own documents. According to the DOJ, ABI's
internal company documents acknowledge that Modelo has "put
increasing pressure" on ABI competitively and that
Modelo's strategy to gain share through price competition is
"at odds with ABI's well-established practice of leading
prices upward with the expectation that its competitors will
follow." The complaint also highlights ABI's
"Conduct Plan," a strategic plan for pricing "that
reads like a how-to manual for successful price
coordination."
According to the complaint, "in an effective acknowledgement
that the acquisition of Modelo raises significant competitive
concerns," ABI had voluntarily entered into an agreement to
grant Constellation the exclusive right to import Modelo beer into
the U.S. for the next ten years, if the Modelo acquisition
closes. Constellation currently imports and sells Modelo
products into the U.S. through a 50/50 joint venture with Modelo
called Crown Imports. Making Constellation the exclusive
importer may have seemed like a logical fix. (The DOJ's
2008 settlement regarding InBev's acquisition of Anheuser-Busch
may have inspired this attempted voluntary remedy. In 2008,
the DOJ required InBev to sell Labatt USA to a DOJ-approved
acquirer and to grant that acquirer a license to brew and sell
Labatt beer for consumption in the United States. In
addition, at the option of the acquirer, InBev had to supply Labatt
brand beer for up to three years to the acquirer in quantities and
units and at prices agreed to between InBev and the acquirer with
the approval of the DOJ. Labatt USA was sold to KPS, a
private equity firm that had acquired a brewery earlier that year.
The DOJ's 2008 order expires ten years from the date
issued.)
Here, ABI planned to sell Modelo's existing 50 percent interest
in Crown to Constellation and then enter into a ten year exclusive
agreement to supply Constellation with Modelo beer to import into
the US. Unlike in the 2008 InBev settlement, the DOJ did not
approve the divestiture beneficiary or the terms of the
agreement. The complaint criticizes the proposed remedy,
which did not include licensing of the Modelo brand or the
divestiture of brewing facilities, alleging that an importer
without its own brewing facilities or brands would be totally
dependent on ABI for its supply of Modelo brand beer. Furthermore,
Constellation's internal documents demonstrated that, unlike
Crown and Modelo, "Constellation's executives have sought
to follow ABI's pricing lead."
The DOJ alleged that the close supply relationship between ABI and
Constellation would further facilitate joint pricing between the
two companies, given the information exchange and ABI's
opportunity to reward or punish Constellation for pricing
actions. In contrast, although ABI already owns just over 50
percent of Modelo, the DOJ concluded that firewalls and a lack of
voting or effective control had successfully insulated Modelo from
ABI's influence.
A lesson from the ABI remedy proposal is, parties may hope to save
time by crafting their own proposed remedies in advance, but the
federal antitrust agencies will likely approach pre-packaged
settlements with initial skepticism. While proposing remedies
can expedite the merger review timeline, parties should be prepared
to engage with the agencies in the remedy planning process and be
prepared to modify their proposals, especially with regards to the
identity of the divestiture acquirer. The DOJ's complaint
also demonstrates that there are no market share "safe
harbors" in an antitrust agency's merger review. The
US antitrust agencies will carefully review the competitive
dynamics in each affected market segment and they will challenge
transactions even where one of the merging parties has less than
10% market share. In this case, like other recent DOJ merger
challenges Bazaarvoice/PowerReviews and H&R Block/Tax Act, the
DOJ relied on internal company documents to support its competitive
theories of harm. The DOJ will not only rely on the
parties' internal documents, but also third parties'
internal documents, like customers and suppliers'
documents. Moreover, while comments made about market share
and ability to raise prices post-transaction raise red flags, the
DOJ is also sensitive to documents discussing efforts to signal
competitors to follow competitive actions. While there is
nothing wrong with competitors monitoring and reacting to each
other's prices, plans to "stabilize" pricing are
suspect.
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