Jan. 31 (Bloomberg) -- Anheuser-Busch InBev NV and U.S. regulators are proceeding with talks to allow the company to acquire Grupo Modelo SAB even after the government filed a lawsuit to stop it, said people familiar with the matter.
The U.S. Justice Department brought the suit today because a deadline was looming to end its investigation and because it allows the government to keep its options open, according to one of the people, who asked not to be identified because the process is private. The parties haven’t fallen into intractably hostile camps, that person said.
Shares of both companies plunged after the Justice Department filed a complaint today in federal court in Washington. The government argued the transaction violates antitrust law because it would eliminate the “substantial head-to-head competition” between AB InBev and Modelo and “diminish ABI’s incentive to innovate.”
“We still believe a deal will happen, but completion is likely to be delayed” beyond the first quarter of 2013 “and may require concessions,” Melissa Earlam, an analyst at UBS AG in London, wrote today in a note. “We don’t assume this is a deal breaker.”
The transaction between AB InBev, the world’s largest beer maker with almost half the U.S. market, and Modelo would marry Bud Light, the top-selling domestic brand, with Corona, the biggest import, and create a combined company with estimated revenue of about $47 billion this year.
Bill Baer, the head of the Justice Department’s antitrust division, said AB InBev’s proposal to address antitrust concerns by selling Modelo’s stake in Crown Imports LLC, a U.S. distributor Modelo owns jointly with Constellation Brands Inc., fell “far short” of protecting consumers.
“Even with this fix, ABI would still control Modelo’s brand and its brewing and bottling assets,” Baer said in a conference call today. He said the U.S. would seek an injunction to block the deal formally, pending any trial.
“Obviously the parties are free to propose fixes that will avoid the need for an injunction,” he said.
Potential remedies AB InBev is considering include removing the 10-year call option on Crown Imports, said a person familiar with the company’s thinking. The company also plans to argue that the U.S. beer market is already sufficiently competitive and that a deal can in theory be done, the person said.
AB InBev fell as much as 8 percent in Brussels trading on the news, and closed down 7.8 percent, or 5.40 euros ($7.33), at 63.90 euros, giving it a market capitalization of 102.7 billion euros ($139.4 billion). Grupo Modelo fell as much as 10 percent in Mexico City, the biggest intraday decline since October 2008.
Constellation plunged 17 percent to $32.36 at the close in New York, the biggest daily decline since September 1996. Before today, the Victor, New York-based company’s shares had risen 80 percent since June 28, the day before the Modelo deal was announced.
AB InBev, based in Leuven, Belgium, said in a statement it no longer expects the deal to close in first quarter of this year.
The Justice Department’s action is “inconsistent with the law, the facts and the reality of the marketplace,” the company said. “We remain confident in our position, and we intend to vigorously contest the DOJ’s action in federal court.”
Grupo Modelo, based in Mexico City, said in a statement to the Mexican stock exchange it, too, no longer expects the purchase to be completed this quarter.
AB InBev agreed to buy the remaining 50 percent of Modelo it didn’t own in June to increase its presence in emerging markets. Beer sales are rising at a faster pace in Mexico than in developed economies such as the U.S., the world’s second-biggest beer market by volume after China.
AB InBev, which also makes Brazil’s Brahma beer, said it expected the combined company to deliver cost and revenue benefits of at least $600 million annually. The takeover is aimed at extending AB InBev’s lead as the world’s biggest brewer over No. 2 SABMiller Plc. The companies, if combined, would have produced 490 million hectoliters of beer in 2011, compared with SABMiller’s 234 million, the company said.
When it announced the acquisition, AB InBev said that Corona, exported to more than 180 countries already, will have equal prominence as a “global flagship brand” to its Budweiser, acquired in 2008 when InBev bought Anheuser Busch Cos. in a $52 billion deal.
Modelo is Mexico’s largest brewer, controlling about 60 percent of the national beer market with brands including Modelo Especial, Negra Modelo, Pacifico and Victoria. Heineken NV accounts for almost all of the rest of the Mexican market with brands such as Dos Equis and Tecate. Mexico’s antitrust regulator approved the transaction in November.
AB InBev held 47 percent of the U.S. beer market in 2011, according to research by Sanford C. Bernstein & Co., based on analysis of Nielsen data. MillerCoors LLC, the U.S. joint venture between SABMiller and Molson Coors Brewing Co., controlled 28 percent.
“If ABI fully owned and controlled Modelo, ABI would be able to increase beer prices to American consumers,” Baer said in a statement. “This lawsuit seeks to prevent ABI from eliminating Modelo as an important competitive force in the beer industry.”
Americans spent at least $80 billion on beer last year, the department said.
“ABI internal documents acknowledge that Modelo has put ’increasing pressure’ on ABI by pursuing a competitive strategy directly at odds with ABI’s well-established practice of leading prices upward,” according to the complaint.
AB InBev uses its market dominance to coordinate beer prices with competitors such as SABMiller, the department said in the lawsuit. It does this by “purposefully making its price increases transparent to the market so its competitors will get in line,” according to the complaint.
AB InBev’s pricing strategy in the U.S. is governed by what the company termed a “Conduct Plan” that “reads like a how-to manual for successful price coordination,” the department alleged.
AB InBev and SABMiller “have been forced to offer lower prices and discounts for their brands to discourage consumers” from buying Modelo brands, the department said.
Constellation agreed to pay $1.85 billion for Modelo’s stake in Crown Imports, the joint venture for U.S. distribution owned by the two companies. That deal, which would give Constellation the exclusive right to import Modelo beer into the U.S. for 10 years, is contingent upon AB InBev successfully buying Modelo.
The lawsuit alleges the Constellation deal was aimed at winning regulatory approval by “creating a facade of competition” between AB InBev and its importer.
Constellation “would acquire no Modelo brands or brewing facilities under this arrangement -- it remains simply an importer, required to depend on ABI for its supply of Modelo-branded beer,” the department said in the complaint.
The department said Constellation “has already shown through its participation in the Crown joint venture that it does not share Modelo’s incentive to thwart ABI’s price leadership.”
Constellation said in a statement that it was disappointed with the Justice Department’s decision to sue.
“This is a fighting complaint,” said Allen Grunes, an antitrust lawyer with Brownstein Hyatt Farber Schreck LLP in Washington, who isn’t involved in the case. “It’s possible they’ve done an aggressive complaint to push the parties into settling, but the way they’ve written it will make it harder to settle for both sides. This looks more like it’s going to court.”
The case is U.S. v. Anheuser-Busch InBev SA/NV, 13-cv-00127, U.S. District Court, District of Columbia (Washington).
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