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Friday, July 22, 2016

The DOJ Clips AB InBev's Wings in Merger

I'm really getting tired of business news, aren't you? I'm going to try to talk about it less in the future. But when a $107 billion merger of the two largest beer companies in the world is approved by the US Department of Justice, clearing a path for a titan that will control a third of the world's beer production, I should at least acknowledge it in passing. And the news is actually good.

In its approval, the DOJ did two things that will ensure ABI's position in the US doesn't improve much. I was really dreading this merger, and I still think it's going to have malign effects on the world market. But in the US? Not so much. There were two issues here, control of the US market and distribution, and the DOJ addressed both (the full ruling is here).

Spin-Off MillerCoors
As expected, ABI has to spin off MillerCoors as a part of the deal. DOJ: "The settlement requires ABI to divest SABMiller’s entire U.S. business – including SABMiller’s ownership interest in MillerCoors, the right to brew and sell certain SABMiller beers in the United States and the worldwide Miller beer brand rights." This is not unexpected, and has been an acknowledged assumption about what it would take to get the deal past US regulators.

Restrictions on Distribution
More importantly, the DOJ puts strict limits on what ABI can direct its distributors/wholesalers to do, and how many distributor/wholesalers they may own. The press release doesn't detail these, so I'll turn directly to the ruling for the language. Here is the DOJ on the amount of the wholesale market ABI can directly control. "Defendant ABI shall not acquire any equity interests in, or any ownership or control of the assets of, a Distributor if (i) such acquisition would transform said Distributor into  an ABI-Owned Distributor, and (ii) as measured  on the day of entering into an agreement for  such acquisition more than ten percent (10%), by volume."

And here they are on the question of whether ABI can demand certain measures of loyalty from their independent wholesalers. "Defendant ABI shall not unilaterally, or pursuant to the terms of any contract or agreement, provide any reward or penalty to, or in any other way condition its relationship with, an Independent Distributor or any employees or  agents of that Independent Distributor based  upon the amount of sales the Independent Distributor makes of a Third-Party Brewer’s Beer or the marketing, advertising, promotion, or retail placement of such Beer."

The second condition is especially important. Recently ABI had instituted the Voluntary Anheuser-Busch Incentive for Performance Program (VAIP), which incentivized loyalty among its independent distributors. (Why they rolled that out when the merger was pending is anyone's guess. Seems hopelessly clueless to me.)

The DOJ's stipulations were stringent enough that even the Brewers Association, the trade organization that represents small breweries, gave it a qualified thumbs up. All of which means you can safely return to ignoring this issue and just enjoy your fine pint of ale.

One last note. Interestingly, despite having made it over this regulatory hurdle, the merger may not go forward after all--in part thanks to the Brexit.
The takeover of the London-listed brewer has come under scrutiny in recent weeks as a drop in the British currency has reduced the relative attractiveness of the all-cash offer aimed at most SAB shareholders. A source familiar with the matter told Reuters on Wednesday that the company’s board was weighing the terms of AB InBev’s offer, amid rising shareholder disquiet.
Stay tuned.

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