Antitrust Alert: DOJ Shows Flexibility in Crafting Structural Fix for ABI and Modelo
The U.S. Department of Justice ("DOJ") has reached a settlement with Anheuser-Busch InBev ("ABI") and Grupo Modelo S.A.B. de C.V. ("Modelo"), requiring ABI to divest Modelo’s entire U.S. business to Constellation Brands Inc. ("Constellation"). The consent decree provides for a straightforward structural fix. ABI has agreed to sell Modelo’s newest Piedras Negras brewery and Modelo’s interest in Crown, its U.S. distribution joint venture with Constellation. ABI also will sell to Constellation (or to some other divestiture buyer if the deal with Constellation falls through) perpetual and exclusive licenses to the Modelo brands for distribution and sale in the United States. Coming after DOJ's rejection of a softer remedy proposed by ABI, the final settlement reflects DOJ’s continued reliance on structural remedies as the default fix for horizontal mergers that may lessen competition.
On January 31, the DOJ filed a civil antitrust lawsuit in federal district court in Washington, D.C., challenging ABI’s $20 billion proposed acquisition of the remaining 50 percent interest in Modelo, the producer of Corona Extra, the best-selling imported beer in the United States. Shortly after the DOJ filed its lawsuit, ABI reached a new $4.75 billion deal that gives Constellation full ownership of Crown, the Piedras Negras brewery in Mexico, and perpetual licenses to Modelo’s brands. The announced settlement is "substantially in line" with this revised agreement.
The key elements of the remedy – ABI agreeing to sell to Constellation the Piedras Negras brewery, its interest in Crown, and perpetual and exclusive licenses to the Modelo brands in the United States – clearly are both more substantial and more "structural" than the original supply agreement fix that ABI proposed. When ABI announced the Modelo acquisition back in June 2012, ABI simultaneously offered a fix to address U.S. competitive overlaps. But in that remedy, ABI planned only to sell Crown to Constellation and to brew Modelo brands for Constellation under a long-term supply agreement, while retaining all of Modelo’s brewing assets. ABI also would have had the ability to reacquire Modelo’s U.S. business after ten years. The settlement filed on April 19 shows that ABI’s original fix greatly underestimated the extent to which the DOJ would require a more complete and permanent remedy.
In addition to the DOJ’s insistence on a core structural remedy, the settlement is noteworthy in that it includes many elements of a conduct fix that were necessary to make the structural elements work. Constellation is pledging to expand the Piedras Negras brewery over the next three years to at least 20 million hectoliters and must "use its best efforts" to meet specific interim deadlines and targets, such as executing contracts with design and engineering firms within six months and completing construction of the brewhouse within 30 months. Because Constellation needs this time to achieve brewing independence, even under the DOJ settlement ABI will provide transition services to Constellation, including brewing, for a period up to three years.
In further recognition that there will need to be some ongoing collaboration between Constellation and ABI, the consent decree also imposes some conduct obligations on ABI with respect to the distribution of Modelo brands over the next three years. Where Modelo brands in the United States are distributed through ABI majority-owned houses, Constellation can direct those distributors to sell their distribution rights for Modelo brands to another distributor. Where Modelo brands go through ABI affiliated (but not owned) houses, ABI cannot change its distributor incentive program to penalize ABI distributors for carrying Modelo brands. These provisions also show that the DOJ is aware of the importance of effective distribution to ensuring the competitiveness of the Modelo brands.
The proposed settlement still needs court approval, before which there is a 60-day public comment period. After the public comment period, the settlement will become final if the court determines (as expected) that it serves the public interest.
An obvious lesson from the settlement is that the DOJ will require true structural relief to address substantial potential competitive harms. Perhaps more noteworthy is the extent to which the DOJ may be flexible about behavioral provisions in the context of a structural fix. In ABI/Modelo, the DOJ not only accepted pledges by the divestiture buyer to become more competitive, but also a relatively long (three-year) interim supply relationship between competitors. Merging parties therefore should anticipate that remedy proposals should include structural relief, but also that behavioral elements may be acceptable to complement the underlying structural fix.
The settlement also illustrates that the DOJ is sensitive to the importance of efficient distribution for any acquirer of new assets. Constellation is protected from unfavorable ABI-owned distributor contracts for the three years, during which it would be reliant on ABI for brewing. Presumably, Constellation can use this time to ensure the long-term competitive distribution of its brands. This is consistent with the DOJ’s more general requirement that any divestiture acquirer be an effective, independent competitor in the market.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Peter J. Love
Kenneth W. Field
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