U.S. tries to block big beer deal

If you had dreams of buying Corona for the same price as a Bud Light, think again. The Justice Department is trying to stop a merger by the biggest U.S. maker of beer and the biggest beer importer.

Here are the details from the New York Times:

The Justice Department sued on Thursday to block Anheuser-Busch InBev’s proposed $20.1 billion deal to buy control of Grupo Modelo of Mexico, arguing that the merger would significantly reduce competition in the American beer market.

The deal, announced last summer, would add Corona Extra to the company’s formidable stable of brands, including Budweiser and Stella Artois.

But the Justice Department said in its lawsuit, filed in Federal District Court in Washington, that allowing the merger to proceed would reduce competition in the beer industry across the country as a whole and in 26 metropolitan areas in particular. The combined company would control about 46 percent of annual sales in the country, the government said, far outpacing Anheuser-Busch InBev’s closest competitor, MillerCoors.

“Even small price increases could lead to significant harm,” William J. Baer, head of the Justice Department’s antitrust division, said on a conference call with reporters. “We took this action today because we believe the acquisition is a bad deal for American consumers.”

The deal is the biggest to be opposed by the Justice Department since 2011, when it sued to block AT&T’s proposed $39 billion takeover of T-Mobile USA.

The Financial Times points out that the combined company would have incredible pricing power.

AB InBev’s Bud Light is the best-selling beer in the US and Modelo’s Corona Extra is the best-selling import. The combined company would control about 46 per cent of the $80bn US beer market.

“If ABI fully owned and controlled Modelo, ABI would be able to increase beer prices to American consumers,” said Bill Baer, assistant attorney-general in charge of the justice department’s antitrust division. “This lawsuit seeks to prevent ABI from eliminating Modelo as an important competitive force in the beer industry.”

The DoJ suit cites internal AB InBev documents acknowledging that Modelo had undermined its strategy on pricing by refusing to match its annual increases, which the rest of the industry had followed.

AB InBev, the world’s largest brewer by revenues, agreed last June to pay $20.1bn to take full control of the Mexican brewer, in which it already had a 50 per cent stake, expanding its efforts to lead consolidation in the beer market.

The Wall Street Journal chose to focus their coverage on the fact that InBev already owned part of Modelo. (The below skips around the story.)

The news caused shares of the two companies to drop sharply, and it hit shares of Constellation Brands Inc even harder because Constellation was set to expand as part of a side deal in the merger.

AB InBev hammered out the deal for Grupo Modelo last summer, hoping to augment its position in the fast-growing Mexican market while expanding the reach of Modelo brands globally. The companies are the first and third largest brewers of beer sold in the U.S.

AB InBev already owns a 50% noncontrolling stake in Modelo, whose stable includes Corona Extra, the best-selling imported beer in the U.S., as well as Modelo Especial and Pacifico. AB InBev proposed to buy the rest from the Mexican families that control Modelo in a cash deal.

AB InBev inherited the Modelo stake in InBev’s $52 billion takeover of Budweiser maker Anheuser-Busch in 2008. AB InBev has only a 43% voting interest in Modelo, according to the Justice Department, and lacks operational control of the Mexican company. The Justice Department said the acquisition of full control would give AB InBev enhanced market power.

AB InBev and Modelo sought to allay antitrust concerns through a side deal in which Modelo was to sell its 50% stake in Crown Imports, a joint venture with Constellation Brands that imports and markets Modelo brands in the U.S. Constellation agreed to pay $1.85 billion for the stake.

AB InBev argued that the arrangement would address fears of overconcentration because Constellation would control the import and sale of Corona brands in the U.S., meaning decisions on the price of Corona Extra would remain separate from Bud Light pricing. Mexico’s antitrust authority signed off on the deal.

But for all you beer lovers out there, it’s good to know the Justice Department is concerned about the price of your six-pack. I’m sure there will be more to come on this saga, but until then, cheers.