Grokking ABI's Antitrust Chances

FILED JUNE 27, 2012

June 27, 2012

Dear Client:

While it's tough to handicap what the government will do, we asked veteran bev-alc attorney Drew Jaglom of Tannenbaum Helpern Syracuse & Hirschtritt LLP to perform a side-of-envelope analysis on how the Feds might view an acquisition of Grupo Modelo's brands by ABI in the United States, ergo an acquisition of the Crown Imports joint venture. Here is what he had to say:

"Harry, in your earlier articles on the ABI-Modelo talks, you referred to 'certain formulas with German sounding names.' What you were referring to was the Herfindahl-Hirschman Index (HHI) of market concentration, a measure of how concentrated - and therefore anticompetitive - a given market is. (Incidentally, while Hirschman was indeed German, Herfindahl was a North Dakotan of Swedish descent. So you were half right.)

"Without getting into the technical details of how the HHI is calculated*, the Horizontal Merger Guidelines put out by the Department of Justice and the FTC classify markets as highly concentrated (HHI above 2500), moderately concentrated (HHI of 1500-2500) or unconcentrated (HHI below 1500).

"They also classify mergers by how they change the concentration of a market. Small changes in concentration (an HHI increase of less than 100), or mergers that result in an unconcentrated market, are viewed as not likely to have an adverse effect on competition, and generally do not require further analysis. Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points do potentially raise significant competitive concerns and so often are reviewed more closely. And mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise 'significant competitive concerns' and will generally be reviewed; if the HHI increase is over more than 200 points, DoJ and FTC will presume the merger will be likely to enhance market power and will require persuasive evidence to the contrary before allowing the merger to proceed.

"So what does all this mean for ABI and Modelo? Well, looking at some 2011 market share data for the top 10 suppliers, I calculate an HHI for the beer industry of about 3067, making it a highly concentrated market. And if we combine ABI and Crown, the HHI shoots up to over 3600, an increase of 533 points, well above the 200 point threshold for a presumption of anticompetitiveness.

"Bottom line: It will be very tough to persuade the Justice Department or the FTC that ABI taking over distribution of Modelo in the U.S. should be permitted. That doesn't mean ABI won't be permitted to acquire the rest of Modelo, but it does mean that the antitrust authorities are likely to insist on the Modelo brands continuing to be distributed independently of ABI, as they are today by Crown.

"One note of caution: this analysis assumes that beer is a relevant market for antitrust purposes. There is some basis for an argument that the relevant market should be all alcoholic beverages , rather than just beer, because arguably a "a small but significant and non-transitory increase in price" (a "SSNIP") of 5% on all beer would result in significant sales losses to wine and spirits, to the point that the price increase would not be profitable. It's an uphill battle, I think, but obviously the ABI and Crown market shares are far less if you look at all alcoholic beverages rather than just beer. I haven't done that analysis, but I'm pretty confident that if you did, the proposed acquisition would pass muster.

[* For math geeks, the HHI is the sum of the square of the market share of each industry member. A monopolist with 100 share yields an HHI of 10,000. Five sellers with 20 share each mean an HHI of 2,000. One hundred sellers each with 1 share yield an HHI of 100.]

There you have it. It seems ABI has an uphill battle if Crown is indeed in their sights. My opinion is that ABI will leave the Crown Imports J-V in place until the contract is up in 2016, then renegotiate the terms just as Modelo would've done. But you never know.

Another consideration that an alert reader pointed out: Close to 10% of A-B's U.S. volume goes through brewery-owned branches. Vertical integration is also an antitrust issue, and "part of the reason the three-tier system was put in place." The feds are not above looking at antitrust at the distributor level, as we often saw in the 1970s, though not much action since then. So lots of moving parts.

A-B already has branches in Boston, Mass.; Canton, Ohio; Chicago, IL; Denver, Colo.; Eugene, Ore.; part of Los Angeles, Calif.; Louisville, KY; New York, NY; part of New Jersey, NJ; Oahu, Hawaii; Oklahoma City, Okla; Pomona, Calif.; Riverside, Calif.; San Diego, Calif.; Seattle, WA; Tulsa, Okla. Would they want Corona in those markets?


BEER BRIEFS:

THE STANDARD AND POOR'S STOCK INDEX has announced that Monster Beverage will be added to the S&P 500 index this week. It will replace Sara Lee which is splitting its business into two stocks. Earlier this year there was much speculation on whether Coke would make an offer for Monster, but that never came to fruition.

LOOK EAST, YOUNG MAN. Yet another west coast craft brewer looking to build a brewery on the east coast. Green Flash of San Diego is looking at locations for an east coast brewery, according to Craft Business Daily . Looking to be finished by January 2015.

CHRISTINE CELIS has re-acquired the Celis name and plans to brew her father, the late Pierre Celis, famous wit beer again in Austin. Celis was acquired by Miller in the late 1990s and then shut down and sold in 2000. Stay tuned for updates.

Until tomorrow, Harry

"Be sure your wisest words are those you do not say."
-Robert W. Service


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