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DOJ settles with AB InBev on Modelo deal

by William McConnell in Washington | Published April 22, 2013 at 9:29 AM

The Department of Justice Friday reached a settlement with Anheuser-Busch InBev SA/NV and Grupo Modelo SAB de CV allowing the companies to go through with their proposed $20.1 billion merger.

The agreement settles a DOJ lawsuit brought against the merger January 31.

The agreement requires the companies to divest Mexico City-based Modelo's entire U.S. business -- including licenses of Modelo brand beers, its most advanced brewery, Piedras Negras, its interest in Crown Imports LLC and other assets -- to Constellation Brands Inc., in order to go forward with their merger.

The department said the proposed settlement will maintain competition in the beer industry nationwide, benefitting consumers.

The department's lawsuit against the merger alleged that the deal as originally proposed would substantially lessen competition in the market for beer in the United States as a whole and specifically in 26 metropolitan areas across the United States, leading to higher prices for beer and would also limit the introduction of new beer brands. AB InBev and Modelo are the largest and third-largest beer sellers in the U.S., respectively, and combined they control about 46% of annual sales in the U.S. AB InBev is the brewer of Budweiser, Stella Artois, Beck's and many other brands.

"The proposed settlement announced today will create an independent, fully integrated and economically viable competitor to ABI," said Bill Baer, assistant attorney general in charge of the DOJ's antitrust division. "This is a win for the $80 billion U.S. beer market and consumers. If this settlement makes just a one percent difference in prices, U.S. consumers will save almost $1 billion a year."

The settlement is roughly the same as one ABI and Modelo offered in February but contains additional binding commitments to the revised transaction, which the DOJ said are designed to ensure a prompt divestiture of assets by AB InBev to Constellation, the necessary build-out of Modelo's Piedras Negras brewery by Constellation, as well as certain distribution guarantees for Constellation in the United States.

The Mexican Competition Commission approved the revised transaction in early April, and the transaction is expected to close in June.

The settlement requires ABI and Modelo to divest Modelo's entire U.S. business to Constellation for $2.9 billion or to an alternative purchaser if the transaction with Constellation is not completed. Specifically, ABI and Modelo must divest the Piedras Negras brewery, Modelo's newest, most technologically advanced brewery; perpetual and exclusive licenses of the Modelo brand beers for distribution and sale in the U.S.; Modelo's current interest in Crown -- the joint venture established by Modelo and Constellation to import, market and sell certain Modelo beers into the United States; and other assets, rights and interests necessary to ensure that Constellation is able to compete in the U.S. beer market using the Modelo brand beers, independent of a relationship to ABI and Modelo.

The brands to be licensed to Constellation include all seven brands that Modelo currently offers in the U.S. -- Corona Extra, Corona Light, Modelo Especial, Negra Modelo, Modelo Light, Pacifico and Victoria -- as well as three brands not yet offered in the United States, but currently sold by Modelo in Mexico -- Pacifico Light, Barrilito and León.

Corona Extra is the best-selling imported beer in the U.S., and Corona Light is the leading imported light beer. Modelo Especial is the third largest and the fastest-growing major imported beer brand.

The licenses also include rights that are intended to give Constellation the ability to adapt to changing market conditions in the United States.

For its part, Constellation has committed to expand the capacity of Piedras Negras in order to meet current and future demand for the Modelo brands in the United States, a commitment that is a condition of the proposed settlement. The settlement also sets milestones for the expansion of the Piedras Negras brewery. In order to enable Constellation to compete in the United States during the time it takes to expand the Piedras Negras brewery's capacity to brew and bottle beer, the settlement requires ABI to enter into interim supply and transition services agreements with Constellation. These agreements are time-limited to ensure that Constellation will become a fully independent competitor to ABI as soon as practicable.

The settlement must by approved by Judge Richard Roberts of the U.S. District Court for the District of Columbia.

Ray Jacobsen, partner at McDermott Will & Emery and antitrust counsel to Constellation, said that the spin off of the brewery, licensing rights and other assets combined to make the divestiture order the largest in history. "This was a very innovative settlement and the first time a buyer for a divested asset was required to build out a facility, but [Constellation] is happy to do it.

He said the settlement was a win-win for all sides. "The DOJ got a new competitor in the market, we got the brewery and the Modelo brands and AB InBev got its deal done."

Jacobsen said talks over the settlement did not begin until the DOJ filed its lawsuit. "We worked intensively -- nearly 24/7 since the lawsuit to put this together."

AB InBev was represented in the antitrust by a team from Skadden, Arps, Slate, Meagher & Flom LLP that included partners Ian John, Steve Sunshine, James Keyte, Karen Hoffman Lent and Clifford Aronson. Modelo was represented by a Cravath, Swaine & Moore LLP team led by partners David Mercado, Christine A. Varney and Yonatan Even.

ABI and Modelo originally proposed selling Modelo's stake in Crown to Constellation and entering into a 10-year supply agreement to provide Modelo beer to Constellation to import into the United States.

The department said it rejected that purported fix because it would have eliminated the Modelo brands as an independent competitive force in the United States beer market. Unlike the companies' original proposal, which left Constellation with no brewing assets and beholden to ABI for the supply of beer, the proposed settlement ensures that Constellation, or an alternative purchaser, will have independent brewing assets and the ownership of the Modelo beer brands for sale in the United States in perpetuity. As a result, Constellation will fully replace Modelo as a competitor in the United States.

ABI is a corporation organized and existing under the laws of Belgium, with headquarters in Leuven, Belgium. ABI brews and markets more beer sold in the United States than any other company, with a 39% market share nationally. ABI owns and operates 125 breweries worldwide, including 12 in the United States. It owns more than 200 different beer brands, including Bud Light -- the best-selling brand in the United States -- and other popular brands such as Budweiser, Busch, Michelob, Natural Light, Stella Artois, Goose Island and Beck's.

Modelo is the third-largest brewer of beer sold in the United States, with a 7% market share nationally. Modelo's Corona Extra is the top-selling beer imported into the United States. ABI currently holds a 35.3% direct interest in Modelo and a 23.3% direct interest in Modelo's operating subsidiary Diblo.

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DOJ settles with AB InBev on Modelo deal

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