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.
Click here to view diagram.
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.