Feds block beer merger

February 7th, 2013

Last summer, Anheuser-Busch InBev and Grupo Modelo SAB agreed to combine forces in the alcoholic beverage market. AB InBev had previously owned roughly 50 percent of Grupo Modelo’s shares and proposed to pay $20 billion for the remaining stake in the company.

The deal, however, hit a major snag, as the U.S. government sued to block the transaction.

The deal may be great for the two breweries but could have major implications on consumers. Authorities argue that with the fusion of the two entities comes the risk of possible overpricing and antitrust violations.

Regulators across the world have been quite fierce in blocking these transactions over the past few years.

For example, in 2011 AT&T attempted to purchase T-Mobile but was forced to abandon the deal. Mergers between Deutsche Borse AG/NYSE Euronext and UPS/TNT Express faced a similar fate.

An AB InBev/Modelo merger does provide substantial reason to question if they are becoming too big in the beer market. Merging the two would create a 46 percent market share with any other competitors, aside from MillerCoors having a very small percentage of the market.

There have been mixed reviews as to the implications of the merger.

Jeffrey Golman, of Mesirow Financial, asked, “Are you going to tell me because they increase the  price of Corona there aren’t other beers you can buy as a substitute?”

Yet, there is potentially some flaw in that logic. Antitrust lawyer Stephen Axin argued, “The fact is you may have 50 different brands of beer on the shelf, but they’re only coming from a few sources.”

The problem then becomes more complex than just not buying a Corona if it’s too pricey. AB InBev/Modelo don’t have just one product, but rather a plethora of brands underneath their umbrella. It becomes more challenging to avoid their brands, especially if your local grocery store carries predominantly their products.

Investors were quick to sell off shares of those involved in the transaction. Both AB InBev and Modelo’s shares tumbled by 5.9 percent and 6.5 percent respectively.

However the firm that took the biggest beating was Constellation Brands, which was down 17.4 percent.

As part of the transaction, Constellation was to take full control of Crown Imports LLC, a joint venture with Modelo. Although they were not in the spotlight of the deal per se, a successful transaction would have allowed Constellation to easily double its future revenues. Many don’t want to see one gargantuan firm have a grip on almost half the market share, but rather smaller players gain more ground. Too much consolidation will only raise prices and reduce diversity of beers in the long run.

Information from The Wall Street Journal was used in this report.