Antitrust Lawyer Blog
Few missions are as important to the U.S. Department of Justice’s Antitrust Division as preventing anti-competitive mergers or permitting them with adequate conditions to prevent competitive harm. After all, a merger is forever — fixing it after the fact is too messy.
The DOJ is currently investigating Anheuser-Busch InBev SA/NV’s (“ABI”) acquisition of SABMiller PLC, the largest beer merger in history, as well as its proposed divestiture of SABMiller’s interest in the MillerCoors LLC Joint Venture to Molson Coors Brewing Company. These proposed transactions lock in place the two largest beer competitors in the United States while fundamentally changing the dynamics in the beer industry for smaller brewers, distributors, wholesalers and retailers. While ABI maintains that the proposed transactions do not change the competitive landscape, the DOJ knows better.
Indeed, the DOJ’s recent approach in approving Charter Communications Inc.’s acquisition of Time Warner Cable Inc. (“TWC”) and its related acquisition of Bright House Networks LLC to create New Charter, the merged firm, is instructive. Despite no geographic overlap in any local market, the DOJ required comprehensive behavioral conditions to prevent New Charter from engaging in future anti-competitive conduct against its smaller rivals. The DOJ should take the same tough and sophisticated approach to protecting consumers from the much larger ABI/SABMiller merger and the new ownership by Molson Coors, which will create two beer giants that will dwarf its rivals.
There are numerous similarities in both deals. Distribution is critical in both industries. Prior to any merger, ABI and TWC already use their power to set up roadblocks for their smaller rivals through vertical arrangements. Post-transaction, ABI/SABMiller, Molson Coors and New Charter will each have a greater ability and incentive to restrict smaller rivals’ access to another tier through vertical agreements. While TWC’s restrictions applied to input providers, and ABI’s apply to distributors, from an economic perspective the restraints serve the same purpose — to foreclose a rival from competing effectively and driving up the costs of rivals. Below is a chart illustrating how the three tiers compare to each other.
DOJ’s Concern Regarding Vertical Foreclosure of Smaller Rivals
On April 25, 2016, the DOJ submitted a proposed final judgment allowing the creation of New Charter as long as the parties agreed to certain behavioral conditions. The DOJ required conditions to resolve its concern that New Charter would have a greater incentive and ability to impose contractual restrictions on video programmers (producers of TV shows and video content), thereby limiting their ability to distribute their content through online video distributors (“OVDs”), such as Netflix, Amazon or Hulu. [1] See Complaint.
New Charter became the second largest cable company and third largest multichannel video programming distributor. MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon. Prior to the merger, however, TWC already had substantial power over programmers’ content. The company used this power to influence programmers’ behavior towards its smaller OVD rivals. TWC was the most aggressive cable company or MVPD in terms of obtaining alternative distribution means (“ADM”) clauses in its contracts with programmers that prohibited or greatly restricted programmers from distributing their content to OVDs or through online distribution. Indeed, the DOJ specifically alleged that “[n]o [cable company] has sought and obtained these restrictive ADMs as frequently, or as successfully, as TWC.” [2] Complaint at 3.
Acknowledging that no horizontal overlap existed between the merging parties, the DOJ noted that “the Clayton Act is concerned with mergers that threaten to reduce the number of quality choices available to consumers by increasing the merging parties’ incentive or ability to engage in conduct that would foreclose competition.”[3] Competitive Impact Statement. Accordingly, the DOJ sought comprehensive relief to ensure that New Charter will not have the ability to foreclose OVD competition and deny customers the benefit of innovation and new services through ADM clauses and other restrictive contracting provisions.
Similarities Between the Charter/TWC and the ABI/SABMiller Mergers
There are many parallels between the Charter/TWC and the ABI/SABMiller transactions. Both deals involve multiple tiers between the producers and the customers.[4] Both transactions involve dominant firms that already have the ability and incentive to pressure companies in other tiers to enter into contracts that have the effect of restricting rivals’ access to consumers, and as a result of the merger, the newly formed mega company would have greater incentive and ability to impose restrictions and/or incentives that could raise entry barriers or foreclose its smaller rivals.
What rings true in Charter/TWC similarly rings true in ABI/SABMiller. For example, in the Charter/TWC complaint, the DOJ expressed concern that:
In the beer industry, it is the emergence of import, craft and small independent brewers that is providing important competition in both product diversity and pricing. For smaller brewers and importers to successfully compete with ABI, they need access to distributors, and ultimately retailers, in order to sell their products to consumers. Large brewers like ABI already enter into agreements that discourage distributors from selling rival beer and prevent retailers from offering adequate or prime shelving space to craft and independent brewers as well as importers.
While the current MillerCoors JV has allowed for open and independent distribution, there is reason to believe that ABI’s proposed divestiture of SABMiller’s share of the JV to Molson Coors to purportedly retain the current levels of competition in the United States, will actually result in New MillerCoors becoming more like ABI. Indeed, the present MillerCoors JV is not a true merger; it is an agreement of limited duration. Currently, MillerCoors is not fully incentivized to maximize its brand portfolio because capital invested in any brand would only benefit its true owner if the JV were to ever be terminated by the parties. Because it is not a full merger, there has not been any realistic incentive for the JV to pursue tactics like ABI’s share of mind incentive program.
Post-transaction, however, New MillerCoors will be a completed merger as Molson Coors will take over 100 percent ownership. New MillerCoors will have integrated management and the incentive and ability to pursue stronger agreements and incentive programs that restrict craft and independent brewers’, as well as importers’, access to distributors and retailers. To the extent that both a merged ABI/SABMiller and New MillerCoors pursue the same strategy, their effectiveness in eliminating craft will increase and distributors will eventually find it financially unattractive for distributors to carry craft brands as distributors are strong-armed into participation in incentive programs or given other carrot or stick threats such as ownership transfer approvals to compel compliance. Moreover, craft brewers will not be able to find or join rival distributors of scale which is critical for volume gains in all retail accounts.[6]
Thus, the competitive concerns in the ABI/SABMiller and MillerCoors transactions effectively mirror the concerns in Charter/TWC: “[t]o the extent a transaction, such as the one at issue here, enhances [a brewer’s] ability or incentive to restrain [craft and independent brewers’] access to [distributors and retailers], and thus to prevent [craft and independent brewers] from becoming a meaningful new competitive option, consumers lose.”[7]
The New Charter Remedies
The conditions that the DOJ negotiated with New Charter are entirely behavioral in nature and serve as a good example of remedies that would be beneficial in resolving the wide-ranging competitive concerns raised by the ABI/SABMiller merger.[8] Proposed Final Judgment. The remedies restrict New Charter’s post-merger conduct in the following ways:
- New Charter is prohibited from entering into or enforcing agreements with programmers that limit, or forbid, OVDs’ access to video content.
- New Charter is prohibited from entering into agreements that create incentives for video programmers to limit access of programming to OVDs.
- New Charter is prohibited from discriminating against, retaliating against, or punishing any video programmer for providing its content to any video distributor.
- New Charter is prohibited from entering into or enforcing agreements with programmers that make it financially unattractive for programmers to license their content to OVDs.
- New Charter is prohibited from entering into or enforcing unconditional most favored nation provisions against a programmer for licensing their content to OVDs.
In sum, the conditions contain broad prohibitions on restrictive contracting practices to ensure that New Charter will not replace ADMs with other contracting practices that would increase barriers for OVDs or otherwise make OVDs less competitive. Indeed, the prohibitions were put in place because the DOJ was concerned that New Charter could enter into certain contracts that are designed to circumvent the order, create incentives to limit distribution to OVDs, or create economic disadvantages for a programmer to license content to an OVD.
The New Charter Remedies Are Not Industry Specific
The behavioral remedies used to resolve the vertical foreclosure concerns raised by the creation of New Charter are applicable to any industry with a multi-tier supply chain and dominant firms that already exert power over other tiers of the supply chain. The DOJ’s goal in New Charter is to prevent the merged firm from raising barriers to entry for smaller horizontal rivals or otherwise make smaller horizontal rivals less competitive. The DOJ is concerned about a merged firm’s increased incentive and ability to protect its market power by denying or raising the costs of an input to its rivals. In other words, the DOJ is concerned about transactions that substantially enhance the merged firm’s ability and incentive to foreclose competition through restrictive contracting provisions or incentive programs that make it economically unattractive to work with the merged firm’s rivals. The New Charter conditions are aimed at protecting competition and consumer choice.
Like TWC, ABI has been squeezing its smaller rivals. Unlike TWC, ABI is a much more dominant firm within its industry. ABI influences the distribution tier through direct ownership or limiting distributors’ ability to carry competitors’ products through its “share of mind” incentive program. ABI’s incentive program discourages distributors from carrying rival beers if they want to be eligible for substantial financial rewards. Post-merger, ABI’s increased global scale and New MillerCoors’ full portfolio of brands will substantially enhance their ability and incentive to obtain provisions in their contracts or promotional agreements that restrict or limit the ability of distributors from distributing their smaller rivals’ products, foreclosing these smaller rivals from effectively competing. While there is nothing illegal about ABI using incentive programs that focus on increased sales of its beer, the DOJ needs to make sure that ABI’s contracts with distributors do not contain terms that create economic disadvantages for them carrying smaller brewers’ beers. The DOJ must be mindful that no beer producer has sought and obtained these incentive programs as frequently, or as successfully, as ABI.
The New Charter remedies line up very well with what the DOJ should do in the proposed ABI/SABMiller transaction. Comparable remedies in the proposed ABI merger would: (1) prohibit or limit ABI’s and New MillerCoors’ ability to use distributor incentive programs or MFN-type agreements with ABI or MillerCoors aligned distributors that create economic disadvantages or make it financially unattractive for them to distribute independent brewers’ beer; (2) prohibit ABI from retaliating or discriminating against distributors for distributing other brewers’ beers; and (3) prohibit ABI and New MillerCoors from engaging in other conduct that would foreclose other independent brewers’ ability to distribute their products to retailers.
Such conditions would not be overly restrictive. ABI and New MillerCoors should be allowed to incentivize their distributors to increase sales of their products. But, as the DOJ addressed in the case of New Charter, they should not be allowed to engage in promotional programs that are designed to make it unattractive for distributors to carry rival products.
Approving a merger is risky business and the DOJ is increasingly aware that it needs to be as thorough as possible to prevent post-merger mischief. The approach in Charter/TWC is sound, and DOJ should take a similar one with respect to ABI/SABMiller.
Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com
[1] See, Complaint, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016).
[2] Id. at 3.
[3] See Competitive Impact Statement, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016). “For example, a merger may create, or substantially enhance, the ability or incentive of the merged firm to protect its market power by denying or raising the price of an input to the firm’s rival.” Id.
[4] It does not matter that the Charter/TWC and the ABI/SABMiller merger concerns involve different tiers or that the power flows in different directions. What matters is that the effects are the same – both mergers involve using power over a different tier of the supply chain in order to disadvantage horizontal rivals.
[5] Complaint, supra note 1 at 3 (emphasis added).
[6] Most local markets are primarily, if not exclusively, served by an ABI aligned distributor and/or a MillerCoors aligned distributor as the only distributors of sufficient scale and scope to service all retail accounts on a daily basis.
[7] Mirroring the language in the Complaint at footnote 5.
[8] See, proposed final judgment, available at https://www.justice.gov/opa/file/846051/download. The behavioral remedies are outlined on pages 5-7.