AB InBev is currently negotiating with the United States Department of Justice to resolve some antitrust concerns and obtain approval for its $20.1 billion agreement to buy out the remaining 50 percent stake in Grupo Modelo SAB de CV (PINK:GPMCF). Anheuser-Busch InBev NV (NYSE:BUD) (EBR:ABI) needs to give up more control of its beer distribution in the United States or sell a brewery to settle the antitrust lawsuit.
According to Herbert Hovenkamp, professor at University of Iowa who teaches antitrust laws, AB InBev must decide if it is willing to give more concessions to the government, fight the lawsuit, or just drop the transaction. Hovenkamp opined, “It’s a tiny percentage that it would go to trial. More often than not, the parties identify some assets that can be spun off.”
In its complaint, the DOJ argued that the AB InBev’s proposal to takeover Grupo Modelo SAB de CV (PINK:GPMCF) is harmful to consumer and it a violation of antitrust laws because it would eliminate the “substantial head-to-head competition” between the companies. The DOJ also cited that it would reduce AB InBev’s incentive to innovate.
According to the DOJ, the remedy provided by the brewer of Budweiser to maintain competition through an agreement by Grupo Modelo to sell 50 percent stake in Crown Imports to Constellation Brands, Inc. (NYSE:STZ) is inadequate to resolve the concerns of the agency. The DOJ emphasized, that Constellation’s management have “sought to follow the pricing lead” of AB InBev.
Yesterday, Bill Baer, head of the antitrust division of DOJ said, “If ABI fully owned and controlled Modelo, ABI would be able to increase beer prices to American consumers. This lawsuit seeks to prevent ABI from eliminating Modelo as an important competitive force in the beer industry.”
Dirk Van Vlaanderen, analysts at Jefferies International in London, believed that AB InBev and the DOJ would find solutions to settle the problem. He said, “We continue to believe some compromise between the parties will ultimately be found as we believe some remedies do exist and the strategic merits of the deal are too compelling for ABI to walk away outright. A solution will, however, take time.”
People familiar with the situation said Anheuser-Busch InBev NV (ADR) (NYSE:BUD) (EBR:ABI) is not willing to sell Grupo Modelo’s newest state-of the art beer bottling plant located near Piedras Negras, Mexico, as a compromise to get the approval of the DOJ. According to Bloomberg, the plant is important for AB InBev in maintaining the supply of Corona beers in the United States. Selling it will reduce its ability to control the prices of Corona beers.
In a research note, analysts at Credit Suisse said AB InBev has two options to get U.S. approval. One option is to assure the DOJ and participants in the beer industry that the price it intends to sell beer to crown is a pre-fixed (and competitive) formula or to transfer a portion of the Corona production for the U.S. to a third party.
In addition, the analysts wrote, “While the Street is expecting Piegras Negras to be transferred in such scenario (representing ~70 of Modelo expert volume in the US), we remind investors that Zacatecas (20 mn HL capacity) and Cd. Obregon (3mn HL) also export beer to the US. In fact before Piedras Negras became operational, Mexico City (11mn HL) also exported beer to the US. In our opinion, Modelo could sell its older (and less efficient) breweries under this less favorable scenario and still keep the benefits of scalability at Piedras Negras (which has the potential to double installed capacity).
Furthermore, analysts believed that Anheuser-Busch InBev NV (ADR) (NYSE:BUD) (EBR:ABI) could theoretically push Grupo Modelo SAB de CV (PINK:GPMCF) not to distribute dividend during its upcoming shareholder next week, if it would give up a brewery to close the deal. Under the acquisition agreement, a dividend could be announced in accordance with Modelo’s FCF generation in 2012. Analysts estimate suggest MXN 3.31 per share.