Teamsters Join Pabst in Alleging MillerCoors' Anti-Competitive Behavior

FILED MAY 13, 2016

Dear Client:

IBT Senior Capital Market Analyst Alan Meyers moderated a call today the Teamsters have brought forth on MegaBrew antitrust issues. Their obvious axe to grind in this forest: The Eden, North Carolina brewery closure. It's a loud one, and it may have legs beyond what they originally thought.

The deal is "receiving a lot of attention" for how it will "negatively affect" "craft" and "consumers," said Alan. But he recognized the Teamsters' concern and topic of call, that "the decision by MillerCoors, announced only two days before merger talks between ABI and SAB became public" to shut the large, efficient and profitable Eden brewery, which they contend would eliminate more than 12% of MillerCoors U.S. production capacity and 4% of total U.S. brewery capacity. In light of the brewery's stellar record and recent Pabst accusations, Teamsters believe "Molson Coors is closing the Eden brewery to reduce production capacity, contract supply, and raise prices in the U.S. market."

In fact you may or may not know that "multiple North Carolina state agencies are working to engage potential buyers to keep the Eden facility open and operational -- the only remedy, in our view, that will protect consumers and preserve competition in the industry going forward." [Obviously, Pabst would seem to be a potentially motivated buyer given their fight with MillerCoors over future supply] . Potential anticompetitive activity is also under scrutiny by North Carolina Attorney General Roy Cooper who is working closely with DOJ and North Carolina state officials.

But the real cage-rattling testimony came from David Laughton, director of the Teamsters' Brewery Workers' Conference.

EDEN CLOSURE NEVER MENTIONED DURING 6 MONTHS OF TEAMSTER NEGOTIATIONS. "The news came as a shock to us: We'd just finished negotiating a 3-year collective bargaining agreement for the Eden workers" in February of 2015; and the "company never once mentioned the possibility of a closure during our six-month negotiation," said David, echoing what Pabst chief Eugene Kashper alleges in his suit.

He also rehashed the idea that Eden enjoyed "crown jewel" status among the MillerCoors system, benchmarking as best-in-class among their own metrics, including cost per barrel. It's won "Millercoors brewery of the year three of the past six years," David said. It produces 35 brands and more than 300 SKUs, including 30-plus Blue Moon "flavors."

Of course it also does a ton of contract brewing. And Pabst Blue Ribbon is Eden's second highest-volume output brand, behind Miller Lite. Per David's numbers, Eden ran more than 700,000 barrels of Pabst products in 2015.

So he "doesn't buy" the "excess capacity, declining volumes" reasoning for brewery closures. In fact "MillerCoors breweries have been running at full or near-full capacity for years," and "for the last 10-15 years the Eden facility was operated 7 days a week, mostly 24 hours a day, with workers regularly [doing] tremendous amounts of overtime." Further, "MillerCoors hasn't laid off a single full-time brewery worker in Eden for the last 20 years" but has also employed a lot of "contingency workers." He asserted the decline in volume is rather "due to dramatic increases in numbers of brands and SKUs."

He finds their waffling on whether and how they'd sell the plant disingenuous, too: In an October 7 meeting with David, "MillerCoors stated they intended only to shut the facility down, not to sell it; They didn't want [it] to get into hands of a competitor." But "now tell us they'd consider a reasonable offer." (More on that from antitrust lawyer testimony below.)

Just this very week, David said during Q&A, he heard that they intend to "keep people in the plant for a longer period of time ... though it probably won't be for production. But it's very expensive to shut one of those plants down. They're already -- $135 million, they've spent, going as far as they've gone, and God knows how much more it's going to cost them," he said.

"That doesn't make sense to me. ... At the end of the day, somewheres down the road, they found a way to make it pay back, because they can raise their prices or whatever. We all know they've done that consistently for the last six years; the price increases have been pretty substantial. And a price increase from the brewer, that means three price increases: The wholesaler takes a price increase, and then the retailer takes a price increase. It's very costly to the consumer when those things happen."

At other points, he was dramatic but succinct: "I've been in this business for a long time, and what I can tell you is that the Eden closure is bad for consumers, bad for workers and certainly bad for the industry."

DOES EDEN SMACK OF ANTI-COMPETITIVE BEHAVIOR? Citing suspect timing, antitrust lawyer Allen Grunes of The Konkurrenz Group attested that "whether the Eden closure was in anticipation of the ABI deal or an independent transaction with Molson Coors, either way you can reasonably see it as merger-related…… It's not like there's a ton of excess capacity in the beer industry," and "this is not a [declining asset]." Again -- reducing capacity tends to drive up prices.

Indeed, in the recently unsealed Pabst suit, the contractee alleges that MillerCoors repeatedly assured Pabst it would have plenty of capacity for years to come (who it contract brews for, of course). But right around the time it dropped the "bombshell of Eden, it said it would no longer have capacity to brew Pabst product," per Allen's summary of Pabst suit.

The Pabst deal would end without renewal, or "else Pabst would have to pay nearly three times as much for each barrel of beer MillerCoors produced for it." Suit also alleges MillerCoors wouldn't lease the brewery to Pabst, but was willing to sell it at "an an astronomical, non-market price..."

"Sounds like MillerCoors doesn't want to see that capacity in the market anymore," Allen concluded.

SIDEBAR: Heileman-Stroh-Pabst did the same thing in the late 80s and early 90s, preferring to sell brewing equip as scrap metal or shipping it to China than create excess capacity here in the US. And remember, Stroh's Tampa brewery, which wasn't scrapped, created the capacity which fueled Yuengling's growth.

Prompted during Q&A on how common something like the Eden closure is ahead of a planned merger, Allen asserted -- it's not.

"The decision to close a big asset just before a major mega-merger is announced is highly unusual," he said. "I can't think of any precedent for a company doing something like that before. It's unusual; it's suspicious; as we've said, it looks very much like a Molson Coors post-merger strategy, in some fashion." Add to that the Pabst deal, which "is really about raising rivals' costs - [it] really does look like anticompetitive elimination of capacity in an industry that has some pretty tight capacity right now."

More on the DOJ angle on deal next week. They're expected to wrap up investigation shortly. But as Diana Moss, president of the American Antitrust Institute, who participated in December's Senate hearing on Megabrew, put it on today's call: The DOJ "would not make their starting point the proposed divestiture [of SAB's stake in MillerCoors to Molson Coors in the U.S.] and call it a day." Fireworks to come. Stand by.

Until Monday, Harry

"Everything happens to everybody sooner or later if there is time enough." - George Bernard Shaw

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