NEW YORK/WASHINGTON- Anheuser-Busch InBev SA (ABI.BR), Grupo Modelo GMODELOC.MX and Constellation Brands Inc (STZ.N) are discussing ways to address U.S. regulators' antitrust concerns over their mega-merger and expect to soon open settlement talks to avoid a trial, a source close to one of the companies said on Friday.
The U.S. Department of Justice said on Thursday it was suing to block AB InBev, the world's biggest beer maker, from buying the half of Mexico's Modelo it does not already own for $20.1 billion, saying the combination would hinder competition and lead to higher beer prices.
Anticipating such a move, the deal includes the sale of Modelo's half of U.S. distributor Crown Imports to its partner, Constellation, for $1.85 billion, which the companies say strips AB InBev of any control over Modelo beers, including Corona, in the United States, the world's most profitable beer market.
That was not enough for the DOJ and now the parties are headed to court for a trial that could drag on for months. But one source, who declined to be named, said the companies are also pursuing "a parallel path" toward a possible settlement.
Officials at all three companies declined to comment. The DOJ was not immediately available.
It could not be learned what specific remedies are being weighed but the agency's complaint lays out some concerns that antitrust experts say may hint at partial fixes.
One issue is the supply of beer. The complaint argues that AB InBev would have the right to withhold supply or terminate the supply agreement or renegotiate its terms. There is also a call option allowing AB InBev to buy all of Crown every 10 years at a fixed multiple.
Speculation has also centered on possible divestitures of Modelo breweries.
If the fight goes to court, it would involve a who's who of legal heavyweights.
"We have a terrific team of people who worked up this case and are going to be involved in litigating it," said Bill Baer, head of the Justice Department's Antitrust Division on Thursday. It is still unclear who its litigator would be, but its complaint was signed by Michelle Seltzer who led its fight against Mexican baker Grupo Bimbo buying U.S. assets of the former Sara Lee.
Christine Varney, a former chief of the Justice Department's Antitrust Division has worked for Modelo, while Greg Craig, who was involved in President Bill Clinton's defense when he faced impeachment, is working for AB InBev.
Also on Friday, Constellation said the DOJ's complaint "demonstrates its incomplete understanding of the proposed transaction."
The DOJ has "overlooked the existence and commercial activities" of Crown Imports, Constellation said. It claims that the deal will actually improve competition since the distributor would be completely independent from the supplier, whereas now, Modelo has an ownership stake.
The stakes are high for Constellation, since the deal was seen as a game-changer for the wine maker because it would diversify its revenue and gave it an important foothold in beer that could eventually lead to more acquisitions.
For AB InBev, the maker of Bud Light and Stella Artois that was itself formed by the biggest cash takeover ever, a crumbling of the deal would see it miss out on dominating an important market in Mexico and lose access to a popular beer it could add to its global network.
Another source close to the deal expressed confidence that it will close.
"Courts are funny things but ... I prefer our side of the case to their side, I'll tell you that," the source said.
"It's a high-stakes game of poker to some extent," added a banker who is not directly involved.
Constellation shares closed up 32 cents at $32.68 on the New York Stock Exchange. AB InBev shares closed up 4 percent at 66.57 euros in Brussels.
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