But winning antitrust approval came at a steep price. The company must divest Modelo’s entire U.S. business, including beer brands such as Corona, as well as its most advanced brewery.
The assets will be sold to Constellation Brands, Inc. for an estimated $4.75 billion, and will make Constellation the third-biggest beer company in the United States.
“This solution provides an excellent outcome for American consumers,” said Antitrust Division head William Baer in an interview, who noted that beer is an $80 billion market. “Consumers would have been injured by even a modest price increase – 1 to 2 percent gets into the billion-dollar plus range very quickly.”
The Justice Department filed suit on January 31 in U.S. District Court for the District of Columbia to block the merger, alleging that the combination of Anheuser, the world’s biggest beer maker, with Mexico-based Modelo would result in higher beer prices and fewer choices for American consumers. In addition to Corona, which is the number-one selling imported beer, Modelo’s brands include Negra Modelo, Pacifico and Victoria.
The $20.1 billion merger would have given the combined company control of nearly half of the U.S. beer market, according to DOJ.
Anheuser already owned 50 percent of Modelo, and to assuage antitrust concerns, the company offered up front to sell Modelo’s 50 percent interest in Crown Imports, which brings Modelo’s beer into the United States, to Crown’s other owner, Constellation, and to supply Constellation with Modelo beer brands for 10 years.
That offer did not satisfy DOJ, which said it would merely create "a facade of competition.” Instead, the government took the rare step of suing to block the deal.
The final settlement is similar to terms proposed by Anheuser in February to restructure the transaction. At the time, CEO Carlos Brito said in a news release that the merger “has always been about Mexico and making Corona more global in all markets other than the U.S.” About 20 percent of Modelo’s beer sales by volume are in the United States.
One novel aspect of the settlement, according to Constellation lawyer Raymond Jacobsen, a partner at McDermott Will & Emery, is that it includes a commitment by Constellation to significantly increase the capacity of the brewery, Piedras Negras. The beer, wine and spirits company, which is based in Victor, NY, was an intervenor defendant in the case.
“This is the first settlement I know of where assets being divested don’t already exist,” Jacobsen said, calling the settlement “a great thing not only for Constellation, but also for consumers.” In addition to Jacobsen, McDermott partners Jon Dubrow, Warren Rosborough and Margaret Warner worked on the matter.
Baer called the arrangement “a little unusual, but absolutely the right thing to do,” and noted that the requirement to expand the brewery is actually part of the court order settling the case. “We needed to be confident that Constellation, which used to be in a 50/50 partnership [with Modelo], would separate themselves and would in a short period of time be able to supply themselves,” he said. “Constellation totally bought into the concept of being an independent competitor.”
The settlement gives Constellation perpetual and exclusive licenses of the Modelo brand beers for distribution and sale in the United States. It also requires Modelo to sell its share of Crown Imports to Constellation.
The divestiture is among the largest ever in merger cases, though it falls short of the $6.5 billion ordered by the Federal Trade Commission in the 2000 merger of BP Amoco and the Atlantic Richfield Co.
Anheuser was represented by Skadden, Arps, Slate, Meagher & Flom lawyers Steven Sunshine, Ian John, James Keyte, Karen Hoffman Lent and Gregory Craig. The firm declined to comment.
Cravath partners Yonatan Even and Richard Stark represented Grupo Modelo, according to court papers. They did not respond to a request for comment.
The deal won approval from Mexican antitrust regulators in early April and is expected to close in June.