WASHINGTON U.S. antitrust regulators are dissatisfied with proposals made by Anheuser-Busch Inbev SA (ABI.BR) in its bid to buy the half of Mexican brewer Grupo Modelo GMODELOC.MX that it does not already own as it works to finish its investigation of the deal, a source close to the talks told Reuters.
The Justice Department's Antitrust Division has shifted into high gear in recent weeks as it looks at the plan by the world's largest brewer to buy out Modelo for $20.1 billion.
In hopes of staving off U.S. antitrust scrutiny, AB InBev agreed to sell Modelo's stake in Crown Imports, its U.S. distributor, to Constellation Brands Inc (STZ.N) for $1.85 billion.
This would mean that AB InBev would not distribute, promote or set the price for Modelo beers like Corona, Negra Modelo and Pacifico, but it would still supply the beers to Crown.
Antitrust experts had expected the Justice Department to focus on the supply agreement, but a source said the government wanted to go further because the sector is so concentrated.
Most of the five antitrust experts polled believed a deal will be reached, but some felt there was still a chance that the parties will go to litigation. AB InBev has said the transaction would close in the first quarter of this year.
Despite a dizzying array of beers on shelves in the United States, the market is dominated by two big players. AB InBev, with 47 percent of the U.S. market, has a large stable of brands from big names like Budweiser and Stella Artois to craft-style beers like Shock Top and Goose Island.
The No. 2 player is MillerCoors, a joint venture between SABMiller Plc SAB.L and Molson Coors Brewing Co (TAP.N), with a 28.4 percent market share, according to Beer Marketer's Insights. Like AB InBev, it sells some craft-style beers, including Blue Moon. Crown is a distant third with 5.3 percent.
U.S. law passed after Prohibition requires that makers of alcoholic drinks sell their products to wholesalers who distribute them to retailers.
Antitrust experts knowledgeable about the beer industry suggested that AB InBev may be under pressure by the government to create more distance between itself and Crown, the wholesaler, perhaps by getting rid of a provision allowing it to buy back Crown in 10 years.
The government could also be willing to accept a plan where AB InBev sells one of its 12 U.S. breweries or Modelo's plant near Piedras Negras, Mexico, close to the Texas border, which makes Modelo beers for the U.S. market.
A media report earlier this week said the company would not be willing to sell the Piedras Negras plant.
Another source familiar with AB InBev leadership said the company would likely be more open to scuttling the 10-year buyback provision or to sell smaller brands like Rolling Rock.
One concern would be that if one of AB InBev's breweries were sold, the new operator would not be able to run it as efficiently as AB InBev or negotiate the same inexpensive, high-volume grain purchases, which could lead to higher beer prices.
Craft brewers have used the proposed transaction as a forum to protest AB InBev's ties to distributors, essentially arguing that its market dominance makes distributors reluctant to push back when it complains about the distributors selling craft beer.
But the Justice Department probe is not looking at that concern, two sources said.
Asked for comment, AB Inbev spokesman Stan Neve said only that the company expected the transaction to close in the first quarter.
(Reporting by Diane Bartz; editing by Ros Krasny and Richard Chang)