Antitrust Lawyer Blog Commentary on Current Developments

Articles Tagged with SABMiller

On March 15, 2018, the Department of Justice’s Antitrust Division filed a modified proposed final judgment (“MPFJ”) and responded to amici briefs filed in the Antitrust Procedures and Penalties Act (“Tunney Act”) proceedings regarding the DOJ’s settlement agreement that allowed Anheuser Busch InBev SA/NV’s (“ABI”) to acquire SABMiller.  In other words, the consent decree that was signed on July 20, 2016 between the Obama DOJ and the merging parties has yet to be approved by a federal court. One would think that the DOJ would move quicker on finalizing a consent decree that allowed the largest beer merger in history proceed.  But, here we are just about at the two-year mark without a finalized decree.

The DOJ permitted the merger of the two largest global brewers, which without a remedy threatened to reduce head-to-head competition between Anheuser Busch InBev SA/NV’s (“ABI”) and MillerCoors in local markets throughout the country.  The DOJ alleged that the elimination of competition between ABI and MillerCoors would increase ABI’s incentive and ability to disadvantage its remaining rivals – in particular, brewers of high-end beers that serve as an important constraint on ABI’s ability to raise its beer prices – by limiting or “impeding the distribution” of their beers, likely resulting in increased prices and fewer choices for consumers.   This allegation is significant because “effective distribution is important for a brewer to be competitive.”

To resolve these competitive concerns, the DOJ’s Proposed Final Judgment required the divestiture, which permanently cemented a duopoly where two suppliers exert control over approximately 85-90% of the distributors in the United States.  The DOJ further acknowledged in its Competitive Impact Statement (“CIS”) that ABI and Molson Coors have business arrangements and contacts throughout the world and that the divestiture may actually facilitate coordination.  Because of the increased likelihood of coordinated anticompetitive effects, the DOJ alleged that the merger “would increase ABI’s incentive and ability to disadvantage its beer rivals by impeding the distribution of its beers.”  Accordingly, the DOJ sought behavioral remedies, which are designed to keep beer distribution independent and open as well as to level the playing field for ABI’s high end rivals.

Andre P. Barlow
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.

In an indirect way, today’s craft beer renaissance in the United States was made possible by prohibition.  The Eighteenth Amendment to the Constitution, normally referred to as prohibition, was in part a reaction to the system of “tied houses” that dominated the alcohol retail market.  Brewers at the time exerted tremendous exclusive control over retailers and used that control to pressure sales without concern for the safety of customers or the general public.  When prohibition was repealed, the states were tasked with putting in place systems that would prevent a repeat of this harmful state of affairs.  The answer was simple, they created a three-tiered system where independent distributors stand between brewers and independent retailers.

The three-tiered system was put in place to prevent brewers from having too much control over what consumers purchase.  Truly independent distributors and retailers want to sell beer driven by consumer demand, and do not want to be beholden to one or two powerful brewers.  Consumers can seek out whatever beer tastes the best, and retailers can get a diverse array of brands from their independent distributor.

However, large beer brewers are actively working to reverse the benefits of a three-tiered system by exerting control over distribution.  To be sure, craft brewers are raising alarm bells over Anheuser-Busch InBev (ABI) incentive programs that significantly reward distributors whose ABI sales reach 98% of their total volume.  Besides employing its incentive programs, ABI has become the largest and fastest growing distributor in the United States.  ABI is also adding retailer locations at a fast clip so it is involved in all three tiers in various locations around the country.  Recently, ABI has employed a strategy of actually purchasing craft brewers in an effort to destroy the craft brews that do not sell out.  Indeed, ABI recently announced purchases of Four Peaks Brewing and Breckenridge Brewery.  ABI’s purchases of craft brewers harm the remaining independent craft brewers in a round about way.  Distributors carry craft brews to meet retailers and its consumers demand for craft brews, but with these craft brew purchases, ABI can replace independent craft brands currently carried by a distributor for ABI owned craft brands.  ABI’s move into craft brews allows distributors to meet the demand for craft beer while also hitting ABI incentive targets.  Accordingly, distributors will likely carry fewer independent craft brews in the future.

We are increasingly aware of how mergers often cost consumers and the economy in less competition, higher prices and less choice.  Fortunately, the Antitrust Division of the Justice Department (“DOJ”) has been more willing to go to court and block deals that will harm consumers.  The DOJ should remind itself of the vital role of tough merger enforcement when it looks at the proposed merger between ABI and SABMiller.

A straightforward merger between the two would raise antitrust alarm bells that would awaken the dead.  Together, the companies control over 70% of the U.S. market by volume and 65% of the market by sales value.[1]  Recognizing such a deal would be a nonstarter, ABI has suggested that any competitive concerns in the United States will disappear because MolsonCoors will acquire control of the MillerCoors joint venture.  Of course, the DOJ has become increasingly skeptical of negotiated attempts to restructure a market to resolve competitive concerns for deal approval – recently rejecting a massive divestiture in Comcast/Time Warner — and as we explain below they should do the same in this deal unless there are substantive amendments.

There is a tremendous amount at stake in this merger.  The increased size and scope of ABI on a global basis will likely have effects in the U.S. market.  Molson Coors taking over the control of the MillerCoors portfolio may also result in significant changes in how the business operates today.  Moreover, economic studies have shown a simple truth – increased beer consolidation leads to higher prices.[2]  The recent expansion of the high end U.S. craft beer market is remarkable in light of the 2007-2008 big brewer (ABI and MillerCoors) mergers thanks to a robust and independent distribution market which has facilitated the explosion of craft beer entry.[3]  But the craft beer segment is increasingly threatened by ABI’s acquisitions of independent craft brewers and increasing efforts to cut off distribution of competition brands within the ABI aligned distribution channels.  Not only is ABI the largest U.S. brewer, it is also the largest U.S. distributor – currently controlling over 135 million cases with $3 billion in sales across distributorships in multiple states.[4]