With a clear nod to the wallets of domestic beer guzzlers, the U.S. Department of Justice said yesterday that it would sue to block Anheuser-Busch InBev’s bid to buy Mexico’s Grupo Modelo, the maker of Corona beer, for $20.1 billion, which was announced last June.
“This is the sort of product that matters to consumers,” says William J. Baer, who left Arnold & Porter to become the DOJ’s antitrust chief in December. “If you have a very slight price increase that happens because of this deal, it could mean that consumers will pay billions of dollars more.”
“The surprise lawsuit … comes just a day after concession talks with the government broke down,” write Brent Kendall and Valerie Bauerlein in the Wall Street Journal. Belgium-based AB InBev promises in a statement “to vigorously contest the DOJ’s action in federal court,” claiming it “is inconsistent with the law, the facts and the reality of the market place.”
“The lawsuit is the first major roadblock in a decade of consolidation by brewers around the world, which has reduced the industry to only a few major players, primarily multinationals that own a majority of big brands,” Michael de la Merced points out in the New York Times.
“The U.S. beer industry – which serves tens of millions of consumers at all levels of income – is highly concentrated with just two firms accounting for approximately 65% of all sales nationwide,” according to the complaint filed in U.S. District Court for the District of Columbia. “The transaction that is the subject of this complaint threatens competition by combining the largest and third-largest brewers of beer sold in the United States.”
Chicago-based MillerCoors, whose top seller is the No. 2 brand Coors Light, is also the No. 2 brewer in the U.S. Right now, Modelo, whose Corona is the best-selling imported beer in the U.S., has about a 7% share in the U.S. but AB InBev and Modelo together would control about 46% of the pie, Kendall and Bauerlein report.
The complaint alleges that ABI’s and Modelo’s efforts to remedy the anticompetitive aspects of their transaction -- ABI has agreed to sell Modelo’s existing 50% interest in Crown Imports to its Crown joint venture partner, Constellation Brands -- are “inadequate,” according to a DOJ release about the action. It cites, in particular, a document written by Crown’s CEO [Bill Hackett] to his employees after the acquisition was announced: “Our #1 competitor will now be our supplier … it is not currently or will not, going forward, be ‘business as usual.’”
What about the rise of all those craft beers, you say? Indeed, “There’s never been a broader choice of brands, choice, styles, flavors ever, certainly not in our lifetimes,” Eric Shepard, executive editor of Beer Marketer’s Insights, tells the Washington Post’s Jia Lynn Yang. But Sandeep Vaheesan, special counsel for the American Antitrust Institute, retorts that “the success of craft brewers is really dependent on ‘the big two’ playing nice.”
The AAI has called on DOJ to squelch the deal, saying “an independent Modelo has served as a particularly active, creative, and influential competitor in the beer industry.”
What does the yesterday’s action presage for other would-be dealmakers?
Baer, who had been nominated 11 months before his confirmation by the dilly-dallying Senate to fill a vacancy in the position that dated from August 2011, when Christine A. Varney resigned, has been expected to continue the department’s “reinvigorated enforcement of antitrust laws after a period of lax oversight during the Bush administration,” the New York Times’ Peter Lattman wrote at the time of his confirmation.
A quintessential Washington insider, Baer had worked twice at the Federal Trade Commission including heading its competition bureau from 1995 to 1999, Lattman points out, and he also successfully defended General Electric against price-fixing allegations in the 1990s. He was dubbed one of the “Decade’s Most Influential Lawyers” by the National Law Journal in 2010, Bloomberg’s Sara Forden reports.
“He’s an experienced enforcer who knows how to make hard judgments in both directions,” Janet McDavid, a partner with Hogan Lovells US LLP who has worked with Baer on numerous cases, tells Forden. “He’s aggressive, but sensible.”
“What was strange about this [AB-Inbev/Modelo] deal all along is that you had the analysts so adamant (or was it wishful thinking?) that the deal would close without many concessions in the first quarter, and you had both ABI's and Constellation's investor relations teams egging them on; and then on the other side you had this advocacy community and ex-antitrust attorneys signaling that the deal was in big trouble,” commentsBeer Business Daily’s Harry Schuhmacher.
“… It turns out the DOJ is more of an active consumer watchdog than many in the financial community thought,” he concludes.