The DOJ permitted the merger of the two largest global brewers, which without a remedy threatened to reduce head-to-head competition between Anheuser Busch InBev SA/NV’s (“ABI”) and MillerCoors in local markets throughout the country.  The DOJ alleged that the elimination of competition between ABI and MillerCoors would increase ABI’s incentive and ability to disadvantage its remaining rivals – in particular, brewers of high-end beers that serve as an important constraint on ABI’s ability to raise its beer prices – by limiting or “impeding the distribution” of their beers, likely resulting in increased prices and fewer choices for consumers.   This allegation is significant because “effective distribution is important for a brewer to be competitive.”

To resolve these competitive concerns, the DOJ’s Proposed Final Judgment required the divestiture, which permanently cemented a duopoly where two suppliers exert control over approximately 85-90% of the distributors in the United States.  The DOJ further acknowledged in its Competitive Impact Statement (“CIS”) that ABI and Molson Coors have business arrangements and contacts throughout the world and that the divestiture may actually facilitate coordination.  Because of the increased likelihood of coordinated anticompetitive effects, the DOJ alleged that the merger “would increase ABI’s incentive and ability to disadvantage its beer rivals by impeding the distribution of its beers.”  Accordingly, the DOJ sought behavioral remedies, which are designed to keep beer distribution independent and open as well as to level the playing field for ABI’s high end rivals.

The Court now must determine whether the MPFJ is in the public interest, as mandated by the “Tunney Act”.  Specifically, the district court must determine whether the remedy secured in the MPFJ adequately restores competition.  For the MPFJ to be meaningful, the DOJ and the federal court need to have the tools to effectively enforce the decree.  So careful scrutiny by the court is important.

The court’s job is very difficult because the consent decree/settlement contains numerous behavioral remedies that require the DOJ and a monitoring trustee to police ABI’s conduct going forward.  Third parties including the Brewers Association, National Beer Wholesalers Association, Yuengling, the Teamsters, and consumer groups, however, raised concerns that careful scrutiny of the details of the settlement agreement are important because as drafted ABI may be capable of creating new strategies designed to harm rival brewers while also following the letter of the decree.  These third parties identified ambiguities in the decree and provided numerous recommendations.  Both changes in the language of the decree and strong oversight is needed to ensure that ABI does not devise new strategies and engage in conduct that could slip through the cracks and harm competition and consumer choice.

The DOJ summarily rejected all third-party arguments and defended its settlement agreement.  At the same time, the Trump DOJ modified and strengthened the decree by adding three new provisions that improve the enforceability of the Division’s consent decree.  First, the DOJ included language that lowers its burden of proof should ABI violate the decree and the DOJ move for contempt.  The DOJ included a “preponderance of the evidence” standard in the decree, which is a lower standard than the “clear and convincing evidence” standard the U.S. antitrust agencies have been held to in the past.  Second, the DOJ included a provision on fee shifting that requires ABI to reimburse the DOJ if the DOJ starts an investigation into a consent decree violation.  Third, the DOJ included a provision that allows for a one-time extension of the term of the decree, if ABI is found to violate the decree.  All three provisions allow for meaningful and effective enforcement of the behavioral decree and should encourage ABI to comply with it.  The good news for consumers is that the DOJ did not walk away from the behavioral remedies even though the head of the DOJ, Makan Delrahim is adamantly opposed to them.  He believes that antitrust is about law enforcement and behavioral remedies are are fundamentally regulatory, which requires the monitoring of what otherwise should be free markets.

As part of the negotiations to include the provisions that strengthened the decree, the DOJ agreed to reduce the time period for the decree, which was originally ten years down to approximately 8 years.  While the DOJ’s efforts in obtaining additional provisions that should meaningfully improve the enforceability of the decree should be applauded, the DOJ should not be short-changing consumers with a shorter time period because of the DOJ’s 20-month delay in this Tunney Act proceeding especially when the DOJ itself has concerns that the divestiture to Molson Coors could result in coordinated conduct in the future.  The reason the DOJ entered into a settlement agreement is because the transaction was anticompetitive under the antitrust laws.  The DOJ should not be rewarding ABI when it designed incentive programs that impeded the growth of rival craft brewers in the not too distant past.  At the ABA Fall Forum, the DOJ’s own Makan Delrahim said that “a short-term remedy is a band-aid, not a fix”.   In other words, “the relief at best only delays the merged firm’s exercise of market power.”  Accordingly, the district court should could consider whether a longer-term band-aid is a better outcome for consumers.

The Honorable Judge Emmet Sullivan is the one who is tasked to make this decision.  He has an enormous responsibility.  Because the MPFJ includes numerous behavioral conditions, the Final Judgment must be absolutely clear to avoid any confusion or ambiguities.  The DOJ defends its MPFJ without recognizing the need for any substantive modifications proposed by the various amicus briefs.  But, Judge Sullivan is statutorily empowered to take into account the competitive landscape to determine whether the MPFJ is in the public interest and is adequate to, at the very least, resolve the anticompetitive concerns identified by the DOJ in its Complaint and CIS.  Given the complexities involved in drafting a behavioral decree as well as the third-party concerns about the numerous ambiguities within the decree that directly impact them, Judge Sullivan should hold a hearing before making his final decision.

 Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

The beer industry readily falls into this category, with the United States market dominated by two players, Anheuser-Busch InBev (ABI), and MillerCoors, a joint venture between South African controlled SABMiller and Molson Coors.  The pending merger between ABI the largest global beer company, and SABMiller, the second largest global beer company, will truly leave ABI in a position in which it can crush its competitors and stifle new entry.  The Justice Department has been examining the merger but only tough comprehensive action by DOJ can prevent the significant threat of Brazilian owned ABI becoming the kingpin of the market.

Using the best lawyers, economists and lobbyists money can buy, ABI has tried to engage in a slight of hand with Congress and the DOJ.  It claims that there are simply no competitive issues from this merger because it plans to divest all of SABMiller’s U.S. operations, which are held by the MillerCoors joint venture, to Molson Coors. And, while that may appear to be correct at first glance, one doesn’t have to dig too deep to pierce this façade and see major competitive problems looming in the future for the beer industry.

ABI says that they can simply sell SABMiller’s share to Molson Coors to resolve any competitive concerns raised by the transaction as the divestiture would maintain the status quo in the United States. But that is not enough under the law. As Judge Amit Mehta said in rejecting a proposed settlement and enjoining the Sysco-US Foods Merger, “Restoring competition requires replacing the competitive intensity lost as a result of the merger rather than focusing narrowly on returning to premerger HHI levels.”

Clearly, simply changing names won’t do that. Molson Coors, while a staple in the American beer industry, is a substantially smaller company than SABMiller, and it simply lacks the financial support of a large international conglomerate. The new MillerCoors will not be as strong once it is solely owned by Molson Coors, especially considering the massive debt Molson Coors will have to take on to pay for this purchase. It will also likely have to rely on ABI in order to import foreign brands that will remain owned by SABMiller but sold by MillerCoors. This means that Molson Coors’ incentives and ability to compete won’t be the same and consumers will lose.

ABI knows how to use its dominant position to make consumers pay a mighty price.  Economic studies have demonstrated that ABI and MillerCoors tacitly collude already to increase prices in lock step fashion.  But, the greatest competition threat for this cozy duopoly comes from craft beer and imports.

To stifle their opportunities, ABI has turned to a playbook of anticompetitive conduct John D Rockefeller would be proud of, marshalling a multipronged attack – cut off avenues to distribution, acquire craft beers, and limit access to outlets. To be successful and grow, craft brewers need cost effective access to retail outlets.  Independent and open distribution has been the safety valve that keeps beer markets competitive and is key to the thriving craft beer industry because it provides craft brewers access to retailers. But, ABI is the fastest growing distributor in the United States and ABI is pursuing strategies such as acquiring distributors and craft brands and implementing distributor incentive programs designed to cut off many avenues for craft brewers to get their products to retailers. Reportedly, ABI’s distributor incentive programs discourage distributors who sell ABI’s beer from selling other brewer’s beer.

Part of the purpose of enacting the Clayton Act 102 years ago was to prevent anticompetitive conduct in its incipiency – before the conduct created substantial competitive harm. Congress recognized that attacking conduct after the fact would require long drawn out litigation that would take tremendous resources and cost. This is a problem Elizabeth Warren identified, stating that antitrust regulators “are very unlikely to force the companies to break up after the fact.” This is true “even if the companies blow off the conditions” they agreed to in order to get the deal through. The Clayton Act sought to provide tools to prevent this harm before it was fully developed in part by giving the DOJ broad powers to enjoin mergers or severely restrict anticompetitive conduct through consent decrees.

That is precisely the problem in this merger. Even, if ABI changes the nameplate on the U.S. headquarters of SABMiller, opportunities for rivals will weaken significantly. Once combined with SABMiller, ABI will add control of almost a third of global beer production to its over 45% market share domestic dominance, enabling it to impose additional substantial hardships on independent distributors and small craft brewers to reach consumers in the market. Worse, once the beer market becomes more cozy, Molson Coors might start to follow ABI’s lead in its distribution strategies. The reality is that the ABI/SABMiller combination with increased global size and scale and post-merger Molson Coors with the control of a broader portfolio of beers, will both have a greater ability and incentive to restrict smaller rivals’ access to the market through acquisitions of distributors and craft brews and implementation of distributor incentive programs that make it financially unattractive for distributors to carry rival brands.  Accordingly, the increased ability and incentive to foreclose smaller and new rivals are merger specific concerns that should be weighed by the Justice Department.

ABI has already secured approval of the merger in all the major jurisdictions except the United States and China. Other jurisdictions, like the E.U. and South Africa, placed extensive conditions on the companies, and forced them to agree to much more than ABI originally intended. For example, the E.U. secured divestitures of $8 billion in assets over ABI’s initial $2 billion proposal and South Africa required a number of remedies to specifically protect the South African craft brewer industry.

American antitrust enforcers need to be just as tough.  DOJ needs to impose remedies to keep the market functioning and competition flourishing. Here, the Justice Department should not simply accept ABI’s divestiture proposal as a remedy when vertical foreclosure concerns exist.  Thoughtful remedies would include a requirement for ABI to divest its ownership of distributors, so that distribution can continue to be run by independent companies who sell what consumers want, not what big brewers tell them to sell. The Justice Department should also seek remedies that would prohibit or limit ABI’s and MillerCoors’ ability: to terminate or acquire distributors; to acquire craft brewers; to use distributor incentive programs that create economic disadvantages or make it financially unattractive for them to distribute rival brewers’ beer; to retaliate or discriminate against distributors for distributing rival brewers’ beers; and to engage in other conduct that would foreclose rival brewers’ ability to distribute their products to retailers.

As the Justice Departments works toward a settlement agreement with ABI, it needs to heed Senator Warren’s warnings on large monopolists and their ability to crush competitors and lock out small rivals and new entrants.  This deal must be remedied correctly to protect beer customers because as Senator Warren understands, a merger is forever.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

On April 25, 2016, the DOJ submitted a proposed final judgment allowing the creation of New Charter as long as the parties agreed to certain behavioral conditions. The DOJ required conditions to resolve its concern that New Charter would have a greater incentive and ability to impose contractual restrictions on video programmers (producers of TV shows and video content), thereby limiting their ability to distribute their content through online video distributors (“OVDs”), such as Netflix, Amazon or Hulu.  [1]  See Complaint.

New Charter became the second largest cable company and third largest multichannel video programming distributor. MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon. Prior to the merger, however, TWC already had substantial power over programmers’ content. The company used this power to influence programmers’ behavior towards its smaller OVD rivals. TWC was the most aggressive cable company or MVPD in terms of obtaining alternative distribution means (“ADM”) clauses in its contracts with programmers that prohibited or greatly restricted programmers from distributing their content to OVDs or through online distribution. Indeed, the DOJ specifically alleged that “[n]o [cable company] has sought and obtained these restrictive ADMs as frequently, or as successfully, as TWC.”  [2]  Complaint at 3.

Acknowledging that no horizontal overlap existed between the merging parties, the DOJ noted that “the Clayton Act is concerned with mergers that threaten to reduce the number of quality choices available to consumers by increasing the merging parties’ incentive or ability to engage in conduct that would foreclose competition.”[3]  Competitive Impact Statement.  Accordingly, the DOJ sought comprehensive relief to ensure that New Charter will not have the ability to foreclose OVD competition and deny customers the benefit of innovation and new services through ADM clauses and other restrictive contracting provisions.

Similarities Between the Charter/TWC and the ABI/SABMiller Mergers

There are many parallels between the Charter/TWC and the ABI/SABMiller transactions. Both deals involve multiple tiers between the producers and the customers.[4] Both transactions involve dominant firms that already have the ability and incentive to pressure companies in other tiers to enter into contracts that have the effect of restricting rivals’ access to consumers, and as a result of the merger, the newly formed mega company would have greater incentive and ability to impose restrictions and/or incentives that could raise entry barriers or foreclose its smaller rivals.

What rings true in Charter/TWC similarly rings true in ABI/SABMiller. For example, in the Charter/TWC complaint, the DOJ expressed concern that:

In the beer industry, it is the emergence of import, craft and small independent brewers that is providing important competition in both product diversity and pricing. For smaller brewers and importers to successfully compete with ABI, they need access to distributors, and ultimately retailers, in order to sell their products to consumers. Large brewers like ABI already enter into agreements that discourage distributors from selling rival beer and prevent retailers from offering adequate or prime shelving space to craft and independent brewers as well as importers.

While the current MillerCoors JV has allowed for open and independent distribution, there is reason to believe that ABI’s proposed divestiture of SABMiller’s share of the JV to Molson Coors to purportedly retain the current levels of competition in the United States, will actually result in New MillerCoors becoming more like ABI. Indeed, the present MillerCoors JV is not a true merger; it is an agreement of limited duration. Currently, MillerCoors is not fully incentivized to maximize its brand portfolio because capital invested in any brand would only benefit its true owner if the JV were to ever be terminated by the parties. Because it is not a full merger, there has not been any realistic incentive for the JV to pursue tactics like ABI’s share of mind incentive program.

Post-transaction, however, New MillerCoors will be a completed merger as Molson Coors will take over 100 percent ownership. New MillerCoors will have integrated management and the incentive and ability to pursue stronger agreements and incentive programs that restrict craft and independent brewers’, as well as importers’, access to distributors and retailers. To the extent that both a merged ABI/SABMiller and New MillerCoors pursue the same strategy, their effectiveness in eliminating craft will increase and distributors will eventually find it financially unattractive for distributors to carry craft brands as distributors are strong-armed into participation in incentive programs or given other carrot or stick threats such as ownership transfer approvals to compel compliance. Moreover, craft brewers will not be able to find or join rival distributors of scale which is critical for volume gains in all retail accounts.[6]

Thus, the competitive concerns in the ABI/SABMiller and MillerCoors transactions effectively mirror the concerns in Charter/TWC: “[t]o the extent a transaction, such as the one at issue here, enhances [a brewer’s] ability or incentive to restrain [craft and independent brewers’] access to [distributors and retailers], and thus to prevent [craft and independent brewers] from becoming a meaningful new competitive option, consumers lose.”[7]

The New Charter Remedies

The conditions that the DOJ negotiated with New Charter are entirely behavioral in nature and serve as a good example of remedies that would be beneficial in resolving the wide-ranging competitive concerns raised by the ABI/SABMiller merger.[8]  Proposed Final Judgment.  The remedies restrict New Charter’s post-merger conduct in the following ways:

• New Charter is prohibited from entering into or enforcing agreements with programmers that limit, or forbid, OVDs’ access to video content.

• New Charter is prohibited from entering into agreements that create incentives for video programmers to limit access of programming to OVDs.

• New Charter is prohibited from discriminating against, retaliating against, or punishing any video programmer for providing its content to any video distributor.

• New Charter is prohibited from entering into or enforcing agreements with programmers that make it financially unattractive for programmers to license their content to OVDs.

• New Charter is prohibited from entering into or enforcing unconditional most favored nation provisions against a programmer for licensing their content to OVDs.

In sum, the conditions contain broad prohibitions on restrictive contracting practices to ensure that New Charter will not replace ADMs with other contracting practices that would increase barriers for OVDs or otherwise make OVDs less competitive. Indeed, the prohibitions were put in place because the DOJ was concerned that New Charter could enter into certain contracts that are designed to circumvent the order, create incentives to limit distribution to OVDs, or create economic disadvantages for a programmer to license content to an OVD.

The New Charter Remedies Are Not Industry Specific

The behavioral remedies used to resolve the vertical foreclosure concerns raised by the creation of New Charter are applicable to any industry with a multi-tier supply chain and dominant firms that already exert power over other tiers of the supply chain. The DOJ’s goal in New Charter is to prevent the merged firm from raising barriers to entry for smaller horizontal rivals or otherwise make smaller horizontal rivals less competitive. The DOJ is concerned about a merged firm’s increased incentive and ability to protect its market power by denying or raising the costs of an input to its rivals. In other words, the DOJ is concerned about transactions that substantially enhance the merged firm’s ability and incentive to foreclose competition through restrictive contracting provisions or incentive programs that make it economically unattractive to work with the merged firm’s rivals. The New Charter conditions are aimed at protecting competition and consumer choice.

Like TWC, ABI has been squeezing its smaller rivals. Unlike TWC, ABI is a much more dominant firm within its industry. ABI influences the distribution tier through direct ownership or limiting distributors’ ability to carry competitors’ products through its “share of mind” incentive program. ABI’s incentive program discourages distributors from carrying rival beers if they want to be eligible for substantial financial rewards. Post-merger, ABI’s increased global scale and New MillerCoors’ full portfolio of brands will substantially enhance their ability and incentive to obtain provisions in their contracts or promotional agreements that restrict or limit the ability of distributors from distributing their smaller rivals’ products, foreclosing these smaller rivals from effectively competing. While there is nothing illegal about ABI using incentive programs that focus on increased sales of its beer, the DOJ needs to make sure that ABI’s contracts with distributors do not contain terms that create economic disadvantages for them carrying smaller brewers’ beers. The DOJ must be mindful that no beer producer has sought and obtained these incentive programs as frequently, or as successfully, as ABI.

The New Charter remedies line up very well with what the DOJ should do in the proposed ABI/SABMiller transaction. Comparable remedies in the proposed ABI merger would: (1) prohibit or limit ABI’s and New MillerCoors’ ability to use distributor incentive programs or MFN-type agreements with ABI or MillerCoors aligned distributors that create economic disadvantages or make it financially unattractive for them to distribute independent brewers’ beer; (2) prohibit ABI from retaliating or discriminating against distributors for distributing other brewers’ beers; and (3) prohibit ABI and New MillerCoors from engaging in other conduct that would foreclose other independent brewers’ ability to distribute their products to retailers.

Such conditions would not be overly restrictive. ABI and New MillerCoors should be allowed to incentivize their distributors to increase sales of their products. But, as the DOJ addressed in the case of New Charter, they should not be allowed to engage in promotional programs that are designed to make it unattractive for distributors to carry rival products.

Approving a merger is risky business and the DOJ is increasingly aware that it needs to be as thorough as possible to prevent post-merger mischief. The approach in Charter/TWC is sound, and DOJ should take a similar one with respect to ABI/SABMiller.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

[1] See, Complaint, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016).

[2] Id. at 3.

[3] See Competitive Impact Statement, U.S. v. Charter Communications, Inc., Time Warner Cable, Inc., No. 16-0795 (D.D.C. 2016). “For example, a merger may create, or substantially enhance, the ability or incentive of the merged firm to protect its market power by denying or raising the price of an input to the firm’s rival.” Id.

[4] It does not matter that the Charter/TWC and the ABI/SABMiller merger concerns involve different tiers or that the power flows in different directions. What matters is that the effects are the same – both mergers involve using power over a different tier of the supply chain in order to disadvantage horizontal rivals.

[5] Complaint, supra note 1 at 3 (emphasis added).

[6] Most local markets are primarily, if not exclusively, served by an ABI aligned distributor and/or a MillerCoors aligned distributor as the only distributors of sufficient scale and scope to service all retail accounts on a daily basis.

[7] Mirroring the language in the Complaint at footnote 5.

[8] See, proposed final judgment, available at https://www.justice.gov/opa/file/846051/download. The behavioral remedies are outlined on pages 5-7.

A straightforward merger between the two would raise antitrust alarm bells that would awaken the dead.  Together, the companies control over 70% of the U.S. market by volume and 65% of the market by sales value.[1]  Recognizing such a deal would be a nonstarter, ABI has suggested that any competitive concerns in the United States will disappear because MolsonCoors will acquire control of the MillerCoors joint venture.  Of course, the DOJ has become increasingly skeptical of negotiated attempts to restructure a market to resolve competitive concerns for deal approval – recently rejecting a massive divestiture in Comcast/Time Warner — and as we explain below they should do the same in this deal unless there are substantive amendments.

There is a tremendous amount at stake in this merger.  The increased size and scope of ABI on a global basis will likely have effects in the U.S. market.  Molson Coors taking over the control of the MillerCoors portfolio may also result in significant changes in how the business operates today.  Moreover, economic studies have shown a simple truth – increased beer consolidation leads to higher prices.[2]  The recent expansion of the high end U.S. craft beer market is remarkable in light of the 2007-2008 big brewer (ABI and MillerCoors) mergers thanks to a robust and independent distribution market which has facilitated the explosion of craft beer entry.[3]  But the craft beer segment is increasingly threatened by ABI’s acquisitions of independent craft brewers and increasing efforts to cut off distribution of competition brands within the ABI aligned distribution channels.  Not only is ABI the largest U.S. brewer, it is also the largest U.S. distributor – currently controlling over 135 million cases with $3 billion in sales across distributorships in multiple states.[4]

Regardless of the public facing attempts to firewall antitrust issues, the proposed acquisition threatens competition in wholesale beer distribution and input markets to brewing and packaging.  This deal produces far more competitive issues than ABI’s acquisition of Groupo Modelo, which was challenged by the DOJ.  At the time, Groupo Modelo commanded only 7% of U.S. market share.[5]

Consumer Harm

There is a simple truth borne out by history.  Beer mergers harm consumers.   In this case, the merger is presumed illegal under the Horizontal Merger Guidelines.[6]  The antitrust enforcement authorities measure market concentration using the Herfindahl-Hirschman Index (“HHI”).  A market with an HHI over 2,500 is considered highly concentrated and a transaction that increases HHI by more than 200 is presumed to be likely to enhance market power.  The HHI of the beer market as of 2014 is 2,751 and the acquisition of SABMiller by ABI would increase that HHI by 2,998 if there are no divestitures.[7]  Even with divestitures it would only take less than 3 points in market share gain for ABI to pass the 200 HHI threshold.

It is difficult to understate these competitive concerns.  In 2008, the DOJ permitted Miller and Coors to form a joint venture.  A careful and thorough econometric study has demonstrated that, since then, tacit collusion between ABI and Miller/Coors has increased over time, substantially increasing the cost of beer to consumers.[8]  The study discovered that prices were stable leading up to the consummation of the joint venture but the prices of ABI and MillerCoors sharply increased after the merger.  The study concluded that tacit collusion best explained the price data.

This tacit collusion is likely to increase now that Molson will take ownership of MillerCoors.  At least with the joint venture, there were two equal voting partners to keep each other honest.  Now, that Molson is taking over MillerCoors, its management incentives may change.  Both Molson and ABI will have significant debts as a result of these acquisitions and could face pressure to increase prices.  Additionally, the U.S. market may exhibit even more characteristics of a duopoly now that MillerCoors is united under a single leadership, meaning that MillerCoors may be more likely to follow ABI on its strategies including price, dealings with suppliers, and dealings with distributors.

Harm to Craft Brewers

One of the biggest concerns of the proposed merger is whether it will lead to a decrease in small brewers’ access to distributors.  The beer market in the United States is a predominantly a three tiered system because state regulation in most states generally requires that the brewer sell to a distributor who then sells to retailers.  This distribution has become the safety valve that keeps beer markets competitive – as the DOJ demonstrated in its challenge to ABI/Modelo, “[e]ffective distribution is important for a brewer to be competitive in the beer industry.”[9]  However, large companies can use their market power to exert a tremendous amount of influence over what beer brands distributors carry.

This is important because ABI and MillerCoors have so far pursued different strategies when it comes to their dealings with distributors.  ABI has pursued a strategy of exclusivity, and has in the past given more favorable terms to distributors who only sell brands owned by ABI.  The 100% share of mind strategy has led ABI to pressure distributors to drop other brewers’ brands.[10]  Recently, the DOJ opened an investigation into ABI’s practices and acquisition of two distributors in the San Jose and Oakland markets.[11]  On the other hand, to date, MillerCoors has been more tolerant of its distributors carrying rival brands.[12]  However, there are no guarantees or provisions in this deal to even require this open practice to remain in place.

In fact, there is a good chance that a 100% Molson owned MillerCoors will follow ABI’s lead in its dealings with distributors.  A Molson owned MillerCoors may have new incentives to adopt different policies towards distributors.  Before the MillerCoors joint venture, SABMiller and Molson Coors successfully shared distributorships and recognized the importance of being open to many suppliers.  Likely, they chose this strategy, because each had relatively small market share compared to ABI.  MillerCoors kept this same strategy as it was under the management of SABMiller and Molson.  Given the change in management and Molson’s new increased size and scope in the U.S. market, Molson’s management may have different incentives.    For example, Molson could change its policy and pressure distributers to stop carrying white beers that compete with Blue Moon, which Molson will get U.S. rights over in this deal.

This problem is further compounded by the fact that ABI is currently the largest distributor in the United States, with $3 billion in sales and 135 million in case volume, and the largest beer supplier with 44.7% of the market.[13]  After the transaction, Molson will have monolithic control over 26% of beer sales.  That’s more than the next 8 largest brewers combined.

Abusive Buyer Power

ABI’s new global scale gives it increased leverage over commodities used in brewing and many other facets of the beer industry that could affect competition in the U.S. market.  ABI and SABMiller are responsible for 21% and 9.6% of world beer production respectively.[14]  The proposed merger would greatly increase ABI’s buyer power by potentially controlling over 30% of total worldwide beer production.[15] The combined ABI –SABMiller entity would have 58% of the global beer profit pool which far outweighs its next closest global competitor Heineken (11%).[16]  Antitrust enforcement agencies are increasingly looking at buyer power and leverage when examining deals.[17]  Abusive buyer power can harm not only input sellers, but also other buyers.

Smaller buyers can be disadvantaged by abusive buyer power due to the “waterbed effect.”[18]  A powerful buyer demanding lower prices or other concessions from suppliers can cause suppliers to increase prices to smaller buyers or otherwise worsen their terms.  The beer industry is particularly vulnerable to waterbed effects due to capacity issues of many inputs involved in the brewing and packaging of beer.

Can maker, Crown Holdings, has recently reportedly dropped both new and existing small craft beer customers and lengthened lead times, implying that they are becoming capacity limited.[19]  Hops shortages occur frequently.  Hops can only be grown in a limited geographic area and requires a lot of water to grow.  Hop growing also has high startup costs and high quality hop plants can take years before they hit full production.  These factors lead to frequent hops shortages that disproportionately impact craft brewers.[20]

Hops come in many varieties that can be roughly divided into two categories: bitter hops used in traditional lagers and aroma hops used predominantly by craft brewers to make more flavorful beers.  ABI is a powerful buyer in the bitter hops market, which is highly commoditized, but does not yet have much market power in the aroma hops market.[21]  The deal could depress prices in the bitter hops market due to ABI’s buyer power and other purchasers who put pressure on their suppliers to compete with ABIs lower costs.  An interesting side effect of this could see more U.S. farmers abandoning the bitter hops market in favor of more profitable aroma hops, further decreasing the ability of other buyers to compete on lager style beers.[22]

ABI’s increased buyer power means that it is more likely to get the inputs it wants, in the quantities it wants, and at the terms it wants.  This is likely to disadvantage input providers, as ABI is notorious for demanding extremely favorable terms like 120 day payment terms.[23]  ABI’s increased monopsony power could also mean worse terms for every other buyer in the market, not just because suppliers may need to raise prices to make up lost profits, but because it may be necessary due to capacity issues.  Smaller buyers could experience delays, poorer terms, or even unavailability.  ABI would also be able to exert its buyer power strategically to disadvantage rivals in this way.

The Proposed Remedies Are Inadequate

Mergers and acquisitions are subject to the Section 7 of the Clayton Act, which prohibits the acquisition of stock or assets where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”[24]  Mergers and acquisitions that would ordinarily violate Section 7 can sometimes proceed if a remedy is crafted that would restore the competition lost.[25]  But the law is unequivocal that any remedy must fully restore the competition lost from the merger.  Structural remedies, such as divestiture, are preferred over behavioral remedies.[26]

Typically, merging companies work with antitrust enforcement agencies to identify areas of concern and agree to appropriate remedies to ensure that the merger can proceed without harming consumers.  Unfortunately, this has not been the case with ABI.  ABI proposed inadequate remedies after its announced plan to purchase Grupo Modelo.[27]  The DOJ had to take ABI to court in order to obtain adequate remedies.  Like here, ABI believed that all problems could be solved simply by selling Modelo’s share of Crown to Crown’s joint venture partner Constellation.[28]

The proposed remedies in this transaction, like Modelo, simply aren’t enough to prevent a disastrous loss of competition.  There are two simple and compelling reasons.  First, no remedy would be complete that did not fully maintain independent distribution and prevent ABI from attacking independent distribution in the future.  ABI’s control of distribution, through ownership and exclusivity arrangements, greatly jeopardizes competition, limits the rivalry of craft beers and leads to higher prices.  This is a problem that many states recognize by prohibiting brewer ownership of distributors.  Craft brewers especially need access to distributors in order to innovate, enter and thrive.  Any remedy should include the sale of ABI owned distribution, a prohibition on exclusivity pressures on distributors, and a moratorium on distributor purchases.  Molson’s purchase of the remaining share of MillerCoors should also be conditioned on remedies that protect independent distribution.

Protection of the distribution channel has already proven to be essential in beer mergers.  In the Modelo transaction, the DOJ imposed conditions on ABI that included barring ABI from using a Distributor Incentive Program to harm Modelo and giving Constellation the right to transfer rights of distribution for Modelo beer from ABI owned distributors to distributors of their choosing.[29]  The judgment also increased reporting requirements for future acquisitions.[30]

Additionally, ABI and Molson will command even greater positions as worldwide input buyers.  As the dominant buyers they will be in the cat bird’s seat, able to manipulate these markets to raise costs to rivals, particularly craft brewers.  This has an immediate impact on the bitter hops market, which will be dominated by ABI and Molson.  ABI and Molson will be able to command the prices and terms they want on a greater percentage of the worldwide hops yield and other competitors will face higher costs impairing their ability to compete.  This problem will be exacerbated by future supply constraints.  Any remedies should take account of this increased purchasing power.

Sometimes the right answer is to say no.  That’s the right answer for the DOJ in this case to the deal as currently proposed.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com