Beer Bust Up

The Department of Justice reached a settlement with Anheuser-Busch InBev SA/NV (ABI) and Grupo Modelo S.A.B. de C.V. that requires the companies to divest Modelo’s entire U.S. business – including licenses of Modelo brand beers, its most advanced brewery, Piedras Negras, its interest in Crown Imports LLC and other assets – to Constellation Brands Inc., in order to go forward with their merger.

On January 31, 2013, the Department filed an antitrust lawsuit against ABI and Modelo alleging that ABI’s $20.1 billion acquisition of the remaining interest in Modelo that ABI did not already own, as originally proposed, would substantially lessen competition in the market for beer in the United States as a whole and in at least 26 metropolitan areas across the United States.

The department alleged that the transaction would result in consumers paying more for beer and would limit innovation in the beer market.

“Before the merger, there were two competitors – Modelo and ABI – and ABI owned a substantial stake in Modelo,” said Antitrust Division chief Bill Baer. “The companies’ proposed merger would have reduced those two competitors to one – ABI. The proposed settlement announced today will create an independent, fully integrated and economically viable competitor to ABI.  This is a win for the $80 billion U.S. beer market and consumers. If this settlement makes just a one percent difference in prices, U.S. consumers will save almost $1 billion a year.”

The settlement requires ABI and Modelo to divest Modelo’s entire U.S. business to Constellation or to an alternative purchaser if for some reason the transaction with Constellation cannot be completed.

Albert Foer of the American Antitrust Institute said that the acquisition as initially proposed “would have increased concentration in the duopolistic U.S. beer market and enhanced the market power of ABI and SABMiller.”

“Modelo has been a dynamic competitor and promoted price and non-price competition in the beer market,” Foer said. “The loss of an independent Modelo would have likely resulted in higher prices and reduced choice for consumers.”

“Although the AAI believes that litigation to block this deal outright would have been justified, it respects the Department’s decision to accept the merging parties’ new proposed remedy,” Foer said. “The transfer of the Modelo brands in the U.S. and the Piedras Negras brewery in Mexico to Constellation appears on balance likely to preserve competition in the U.S. beer market. Critically, Constellation is required to expand the Piedras Negras facility to ensure it can meet current and future demand for the Modelo brands in the U.S. The original proposed remedy that involved assigning marketing, but not production, capabilities to Constellation would have created only a “facade of competition,” as the Department stated in its complaint. It would not have replaced the loss of Modelo as an independent player in the market. This new remedy apparently gives Constellation both the production capacity and marketing assets necessary to sell Modelo’s brands independently in the U.S. The AAI has concerns over whether Constellation will be a true replacement for Modelo because Constellation’s business has been focused on wine and spirits, rather than beer. Lacking the proprietary data available to the Department, we trust that the Department’s investigation found strong evidence to sustain the prediction that Constellation will prove to be a full and effective successor to Modelo in the marketplace.”

The settlement requires ABI and Modelo to divest:  the Piedras Negras brewery, Modelo’s newest, most technologically advanced brewery; perpetual and exclusive licenses of the Modelo brand beers for distribution and sale in the United States; Modelo’s current interest in Crown – the joint venture established by Modelo and Constellation to import, market and sell certain Modelo beers into the United States; and other assets, rights and interests necessary to ensure that Constellation is able to compete in the U.S. beer market using the Modelo brand beers, independent of a relationship to ABI and Modelo.

The licensed brands include all seven brands that Modelo currently offers (through its distributor, Crown) in the United States – Corona Extra, Corona Light, Modelo Especial, Negra Modelo, Modelo Light, Pacifico and Victoria – as well as three brands not yet offered in the United States, but currently sold by Modelo in Mexico – Pacifico Light, Barrilito and León.

The licenses include rights that will give Constellation the ability to adapt to changing market conditions in the United States.

Constellation has committed to expand the capacity of Piedras Negras in order to meet current and future demand for the Modelo brands in the United States, and that commitment is a condition of the proposed settlement.

The settlement also sets milestones for the expansion of the Piedras Negras brewery.

In order to enable Constellation to compete in the United States during the time it takes to expand the Piedras Negras brewery’s capacity to brew and bottle beer, the settlement requires ABI to enter into interim supply and transition services agreements with Constellation.

These agreements are time-limited to ensure that Constellation will become a fully independent competitor to ABI as soon as practicable.

ABI and Modelo originally proposed selling Modelo’s stake in Crown to Constellation and entering into a 10-year supply agreement to provide Modelo beer to Constellation to import into the United States.

The department rejected that purported fix because it would have eliminated the Modelo brands as an independent competitive force in the United States beer market.

Unlike the companies’ original proposal, which left Constellation with no brewing assets and beholden to ABI for the supply of beer, the proposed settlement ensures that Constellation, or an alternative purchaser, will have independent brewing assets and the ownership of the Modelo beer brands for sale in the United States in perpetuity.

As a result, Constellation will fully replace Modelo as a competitor in the United States.

ABI is a corporation organized and existing under the laws of Belgium, with headquarters in Leuven, Belgium.

ABI brews and markets more beer sold in the United States than any other firm, with a 39 percent market share nationally.

ABI owns and operates 125 breweries worldwide, including 12 in the United States.

It owns more than 200 different beer brands, including Bud Light – the best-selling brand in the United States – and other popular brands such as Budweiser, Busch, Michelob, Natural Light, Stella Artois, Goose Island and Beck’s.

Modelo is a corporation organized and existing under the laws of Mexico, with headquarters in Mexico City.

Modelo is the third-largest brewer of beer sold in the United States, with a seven percent market share nationally.

Modelo owns Corona Extra–the top-selling beer imported into the United States.   Its other popular brands sold in the United States include Corona Light, Modelo Especial, Negra Modelo, Victoria and Pacifico.

Crown imports, markets and sells Modelo’s brands into the United States.

ABI currently holds a 35.3 percent direct interest in Modelo and a 23.3 percent direct interest in Modelo’s operating subsidiary Diblo.

Constellation, headquartered in Victor, N.Y, is a beer, wine and spirits company with a portfolio of more than 100 products, including Robert Mondavi, Clos du Bois, Ruffino and SVEDKA Vodka.

It produces wine and distilled spirits, with more than 40 facilities worldwide.

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