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|EI Vice President David D. Smith has extensive experience in merger analysis across a wide range of industries. Before joining EI, he was an economist at the Antitrust Division of the U.S. Department of Justice.|
After originally opposing the acquisition of brewer Grupo Modelo (“Modelo”) by Anheuser-Busch InBev (“ABI”), the U.S. Department of Justice (DOJ) has agreed to accept the deal with a divestiture. DOJ and the companies have asked the court to extend the stay in the case to give them time to work out the settlement’s final details. The merged company will be the largest brewer in the world. DOJ’s original decision to oppose the merger is noteworthy because it was based on a “coordinated effects” theory rather than the more common “unilateral effects” model.
Modelo was the largest brewer in Mexico, and the third-largest brewer measured by U.S. sales. Its brands included Corona Extra, America’s best selling import. Modelo accounted for 7 percent of U.S. beer sales. In 2011, ABI had 39 percent of U.S. beer sales. MillerCoors had 26 percent.
The DOJ complaint identified beer as the relevant product market, though it noted the various beer categories, such as sub-premium and high-end. The relevant geographic markets were the United States and 26 metropolitan areas.
The DOJ’s coordinated effects theory was grounded in documentary evidence that Modelo was a “maverick.” ABI operated as a price leader. MillerCoors typically followed the ABI price increases, while Modelo did not. The complaint alleged that Modelo aggressively priced in the United States through its joint venture, Crown Imports, and that ABI responded by targeting Corona. For example, in 2008 ABI launched Bud Light Lime as a competing brand. DOJ alleged that by eliminating the maverick, the merger would make it easier for ABI to raise prices to consumers.
DOJ rejected the parties’ first settlement offer. ABI initially offered to sell Modelo’s 50 percent interest in Crown to its partner in the joint venture, Constellation. ABI would have entered into an exclusive supply agreement to provide Constellation with Modelo beer for import into the United States, but ABI could terminate this agreement after 10 years. ABI would have retained Modelo’s brands and brewing and bottling facilities.
DOJ apparently viewed the competitor created in this way, Constellation, as an inadequate replacement for Modelo. Under the new divesture agreement, Constellation gets permanent U.S. rights to Corona and Modelo’s other import brands and may purchase Modelo’s Piedras Negras brewery. Although this brewery can provide only 60 percent of Crown’s import needs, Constellation also receives $400 million to expand the brewery’s capacity.