AB InBev admits new Grupo Modelo suit could derail $20.1bn deal

An earlier January 31 action filed in Washington D.C by the US Department of Justice to halt the deal has been delayed until April 9. Reports suggest the two sides are nearing an agreement.

But in its annual report filed with the US Security and Exchange Commission (SEC) the world’s biggest brewer Anheuser-Busch InBev revealed that a new private complaint was filed on March 22 in the US District court, Northern District of California, against AB InBev and Grupo Modelo.

BeverageDaily.com has seen a copy of the complaint, whereby nine disgruntled consumers bring a class action on behalf of all US beer consumers that seeks to stop AB InBev acquiring the Grupo Modelo shares it does not already own.

Edstrom et al. argue that the $20.1bn deal, inked on June 28 2012, would end aggressive competition that had led to lower US beer prices and innovation, enhance AB’s market power and “facilitate coordinated pricing between AB InBev and the next largest brewer, MillerCoors”.​

New action could ‘enjoin or delay’ buyout​

AB InBev said in its Monday SEC filing: “Even if we, Grupo Modelo, Constellation and Crown Imports resolve the litigation with the DOJ, the court in this private action could enjoin the parties from completing the combination with Grupo Modelo, or could further delay it. We intend to defend against it vigorously.” ​AB InBev said.

The action claims that the proposed deal violates Section 7 of the Clayton Antitrust Act, since it “may, and most probably will, substantially lessen competition, and/or tend to create a monopoly in the production, distribution and sale of beer in the United States”.​

As the world’s most profitable beer market, the US was dominated by two firms (AB InBev and MillerCoors) accounting for circa. 80% of sales, the claim states, adding that any merger could damage consumers via higher prices, lower product quality, less innovation, destruction of choice.

The suit claims that the US beer market was “substantially more” ​than simply ‘highly concentrated’ under the Herfindahl Hersch Index (HHI) where 1800 points earns this appellation. The index grades market concentration by adding up squared market share percentages of each market competitor.

An additional 100 points caused antitrust enforcers great concern, the plaintiffs add, stating that the post-transaction US beer market HHI would be 2800, “plainly a market ripe for probable if not collusion and a galloping tendency towards monopoly”.​

For the sake of (pricing) ‘momentum’…​

Edstrom et al. said that AB and Miller Coors found it more profitable to follow each other’s prices – typically initiated by AB in the expectation Miller would follow – than to cut prices in order to win share, but that Modelo had provided a competitive brake on both firms.

Modelo had narrowed the price gap with AB’s premium domestic brands such as Bud and Bud Light under its post-2008 ‘Momentum Plan’, the suit claims, and thus put pressure on AB InBev and MillerCoors to lower prices to dissuade consumers from ‘trading up’ to Modelo brands.

AB InBev’s further move, subject to approval of its Modelo purchase, to sell 50% of the latter’s interest in Crown Imports to joint owner Constellation Brands, is also targeted by the suit.

The plaintiffs state this would create a “façade of competition” ​between AB and its importer (Constellation) but that Constellation would acquire no Modelo brands or brewing facilities under this arrangement, and would depend on AB for its Modelo-branded beer supply.

However, this seems to overlook a further deal​ agreed by AB InBev and Constellation in mid-February seeking to head off US Department of Justice legal action aimed at halting the deal upon this basis.