AB InBev inks $106 billion deal in the shadow of probes

Pallavi Guniganti

14 October 2015

AB InBev inks $106 billion deal in the shadow of probes

AB InBev chief executive Carlos Brito

A blockbuster beer merger between Anheuser-Busch InBev and SABMiller will be reviewed in the US by a Department of Justice that may already be concerned about alleged AB InBev efforts to block competition by limiting rivals’ access to distributors.

After multiple failed bids, AB InBev’s offer of £44 ($67) per SABMiller share won over the target’s board of directors. The companies announced an agreement in principle yesterday, less than a week after AB InBev made its first public offer.

The SABMiller board had said it rejected the earlier offers partly because of regulatory concerns, and claimed that AB InBev had “not yet provided comfort” that it could get the deal past regulatory hurdles in the US and China.

AB InBev chief executive Carlos Brito insisted that the companies’ “geographic footprints are largely complementary on a continental and regional basis,” and that it would proactively work to resolve antitrust reviews promptly, particularly in the US and China.

While the agreement in principle includes a “best efforts” commitment to obtaining clearances, perhaps greater reassurance comes from the inclusion of a $3 billion reverse breakup fee, payable to SABMiller if the deal ultimately fails for lack of regulators’ or AB InBev shareholders’ approval.

The brewery tier

Hammering the point about the lack of overlaps, AB InBev’s website to promote the merger features a world map coloured orange for jurisdictions in which the companies both operate, which includes the US and China, along with Russia, Vietnam, Spain and several other nations.

The American Antitrust Institute anticipated this deal last year in a letter to antitrust division head Bill Baer. The advocacy group estimated AB InBev’s national market share at 40 per cent and SAB’s at 25 per cent based on sales value, and 50 and 30 per cent respectively based on sales volume. “The two companies’ market shares indicate that the merger would be presumptively illegal under the horizontal merger guidelines,” wrote Albert Foer, the AAI's president at the time.

But geographic overlaps that would give the post-merger company a significantly larger market share can be eliminated with divestitures, and many analysts expect AB InBev to sell SABMiller’s stake in MillerCoors.

In its 2013 tie-up with Grupo Modelo, AB InBev assuaged the DoJ’s antitrust worries by selling Modelo’s entire US beer business to third party Constellation Brands.

The American Antitrust Institute opposed the AB InBev/Modelo deal, and its current president Diana Moss said of the new merger that putting together a divestiture package to fully restore competition “would be a challenge, particularly in light of problems with remedies in other recent mergers.”

While the DoJ’s sister antitrust enforcer stumbled lately on two divestiture buyers who went bankrupt, the DoJ was publicly confident in its choice of Constellation – previously only a wine and liquor company – from the beginning of the Modelo deal.

Antitrust division head Bill Baer has tooted the authority’s horn repeatedly on the divestiture. He told the GCR Live Fourth Annual Antitrust Law Leaders Forum in February and Congress in May that the structural remedy already benefits American consumers.

“Constellation has begun offering new draft and canned beers, bringing competition to segments of the market that Grupo Modelo had previously ignored,” and also increased production capacity and the quantity of beer shipped to the US, Baer said.

What a traditional divestiture to remove overlaps might not solve, however, is the problem of AB InBev’s and SAB’s control over distribution.

Moss said the merger likely will make life harder for smaller rivals such as craft brewers, because “a merged ABI-MillerCoors would be a more powerful ‘gatekeeper’ of the critical distribution channels that craft brewers need to get their products onto retail shelves.”

The loss of the small brewers’ presence risks non-price factors such as choice, variety, and innovation that also contribute to consumer welfare, she said. 

The distributor tier

“Moreover, existing concerns over ABI’s attempts to swap distributorships to consolidate and develop regional strongholds and to play hardball with rivals over distribution should be a red flag for the potential adverse effects of the proposed merger,” Moss added.

On Monday, Reuters reported that the US DoJ and the California attorney general are investigating claims that AB InBev is buying distributors – five in just the past few months – and deliberately restricting competitors’ access to them.

The company confirmed it has been in communication with both enforcers regarding its purchases of distributors. An Anheuser-Busch spokesperson said the new acquisitions fully comply with all laws and regulations and are expected to close next month.

“It is a misconception that craft growth is being inhibited in the marketplace,” the spokesperson said, citing a California Craft Brewers Association estimate that there are nearly 600 craft breweries in the state. “So the suggestion that their access to market is somehow encumbered or blocked is not supported by the facts.”

The DoJ and California attorney general’s office declined to comment.

Paul Gatza, director of the national craft brewery trade association Brewers Association, said he is not aware of any members’ being contacted by the California attorney general or DoJ. But he agreed that in a three-tiered system of breweries, distributors and retailers, small brewers need distributors to access the market.

“When the world’s largest brewer owns the middle tier, access to that tier is reduced,” he said. “There are exemptions to that three-tier system, but almost all beer in the US is being sold through a wholesaler and then a retailer.”

AB InBev now owns distributors in a dozen states that permit a brewery to own a distributor, including Colorado, where MillerCoors’ one distributor is, Gatza said.

Craft brewers also distrust AB InBev because of the company’s push in the 1990s to exclude them from distributors it owned or designated as “anchors,” he said, but at least back then, many craft brewers could go to Millers or Coors distributors.

AB InBev also now owns several brands that had been craft breweries, which are defined as those making less than six million barrels of beer annually. These acquisitions allow it to push distributors to carry its brands exclusively, on the grounds that it has the full product range of national, regional and local beers, Gatza said.

The retail tier

There are “murmurings” of pay-to-play agreements in which the big breweries may give discounts or outright pay off retailers to carry their brands, he said. Earlier this year, Massachusetts’ Alcoholic Beverages Control Commission cited several Boston bars for violating state prohibitions on bribing bars to carry breweries’ products.

The American Antitrust Institute letter sent last year contemplates less overtly illegal ways in which craft brewers could lose at the retail level, due to the practice of outsourcing the management of beer aisles to “category captains,” typically the leading manufacturer.

The captains select which brands to carry and how to feature them on shelves, and AB InBev and SABMiller together account for the “overwhelming majority” of captaincies, according to the letter.

“If ABI acquires Miller, it would have more power at the retail level to marginalise rivals,” Foer wrote. “In beer, ABI is the leading category captain and, together with Miller, accounts for the overwhelming majority of category captaincies. From the perspective of retailer profitability, evidence suggests that ABI and Miller category captains, in some parts of the country, are devoting too much space to their own brands and too little to craft beers.”

Counsel to AB InBev

Freshfields Bruckhaus Deringer

Partners John Davies and Thomas Janssens in Brussels

Counsel to SABMiller



Partners Gerwin van Gerven and Bernd Meyring in Brussels and Tom McGrath in New York


Hogan Lovells

Partners Janet McDavid and Logan Breed in Washington, DC, and senior adviser and foreign legal consultant Rachel Brandenburger in New York