In one of the most famous scenes in the Star Wars franchise, Obi-Wan Kenobi used a Jedi mind trick to tell a Stormtrooper that “these aren’t the droids you are looking for” and that they can “move along.” The Stormtrooper ignored what was right in front of him and complied. Tomorrow, the CEO of the largest beer company in the world will be trying a Jedi mind trick of his own.
On Tuesday, the heads of Anheuser-Busch InBev (“ABI”) and Molson Coors testify before the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights in a hearing aptly titled “Ensuring Competition Remains on Tap: The AB InBev/SABMiller merger and the State of Competition in the Beer Industry.” Like Obi Wan they will try to create an illusion and tell the senators that there is no reason to worry about the merger of the two largest beer companies in the world, which will account for over 1/3rd of all global beer production.
This is an illusion the senators should treat with extreme skepticism.
ABI CEO Carlos Brito is expected to say that they have presented the perfect remedy, the divestiture of SABMiller’s 58 percent share of MillerCoors to Molson, and that there is no reason to look under the hood of the deal. Brito will likely say that since MillerCoors already controls the brands of SABMiller in the U.S., that nothing will change.
If it was that simple there would be no reason for a hearing and there would be no army of ABI funded lobbyists pushing the deal forward. Like all illusions, saying that the divestiture resolves all problems in the deal shows a warped view of reality. There are many unresolved issues that need to be carefully examined, and the senators should ask the tough questions.
Let’s remember the rules of the game. Under the antitrust laws a merger remedy must “fully restore competition.” No half measures are permissible. Consumers should not be forced to suffer increased prices or less choice. And when a divestiture is used the acquirer must have the same incentives and ability to fully restore competition.
Under the standards of the law the proposed “remedy” faces some really tough questions.
To begin, will MillerCoors owned by Molson be as effective as MillerCoors jointly owned with SABMiller? Under the SAB powerhouse MillerCoors was part of the second largest beer producer with a strong international presence. There is no guarantee that MillerCoors will be as strong of a competitor under a much smaller parent (industry reports estimate that SABMiller is over three times larger than Molson in terms of global beer production). Will a Molson owned MillerCoors be able to act independently, or will it simply follow ABI’s strategic conduct in important matters such as pricing and distribution?
We also don’t know how dependent Molson will be on ABI in the operation of MillerCoors. MillerCoors controls important import brands of SABMiller including Pilsner Urquell and Tyskie. These brands will be produced by ABI after the merger and Molson will have to rely on ABI for their U.S. supply. And ABI will become by far the dominant buyer of key beer inputs such as hops, with the ability to manipulate those markets. Under the law, a merger remedy can be rejected if the acquirer of the divested assets is overly dependent on the merged firm. It was that concern that led the Department of Justice to sue ABI when it offered a half hearted remedy to resolve competitive concerns over its acquisition of Modelo (eventually the deal was permitted when ABI agree to divest a brewery in Mexico). Shouldn’t ABI be required to do the same in this deal?
And looking at divestitures misses the critical issue in this market – the role of independent distribution. Key antitrust advocates recognize independent distribution is the artery that spurs consumer choice and the explosion of craft beer. Neither does ABI’s proposed remedy do anything to stop its long march to dominance through the acquisition of craft brewers, buying of independent distributors, and setting up retail operations. ABI has made a series of additional strategic moves to shut out independent craft from the market, primarily through pressuring independent distributors to stop carrying imported and craft beers and controlling space on retail shelves. What’s to stop ABI from leveraging this acquisition to further these goals? And what will prevent Molson from following ABI’s lead to extinguish competition?
It’s also important to step back and look at the bigger picture. Merger remedies can often fail despite their good intentions. For example, the joint venture between SABMiller and Molson Coors was permitted by antitrust enforcement agencies in large part because they believed it was necessary to create a strong competitor to ABI. However, a study by former DOJ economists found that consumers got a bad deal. Even though the joint venture produced cost savings, these benefits were not passed down to consumers in lower prices. In fact, the joint venture led to higher prices – with MillerCoors docilely following ABI’s regular price increases. How do we know this coordination won’t increase when ownership of MillerCoors is consolidated under a single owner and Molson’s former partner is owned by ABI?
In a few weeks, millions will be seeing the latest installment of Star Wars to find out what happened to the Empire. Tomorrow, the Senate will be facing a different kind of empire. Hopefully, the Senate recognizes that the proposed remedies are simply inadequate and many hard questions remain before any merger should be allowed to go through. Otherwise it will take more than a rebel alliance to restore beer competition.