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NEW YORK In challenging beer company Anheuser-Busch InBev SA's (ABI.BR) proposed deal with Mexican brewer Grupo Modelo GMODELOC.MX, the U.S. government is applying a powerful legal theory it has used to stop other mergers.
The government alleges in a lawsuit filed in Washington, D.C., federal court that even though Modelo beers only account for 7 percent of the U.S. market, the company plays a critical, pro-competitive force in the market by not following the pricing of the two biggest players: AB InBev, which has 39 percent, and MillerCoors, a joint venture between SABMiller Plc SAB.L and Molson Coors Brewing Co (TAP.N), which has 26 percent. Without Modelo, the government argues, the beer market will be subject to price coordination among the top players.
"The proposed merger would likely increase the ability of ABI and the remaining beer firms to coordinate by eliminating an independent Modelo - which has increasingly inhibited ABI's price leadership - from the market," government lawyers wrote in the complaint.
The $20.1 billion deal would give AB InBev the half of Modelo it does not already own. AB InBev said the government's lawsuit is "inconsistent with the law, the facts and the reality of the market place."
In antitrust law, the so-called "coordinated effects" theory holds that in a highly concentrated market, competitors might coordinate their prices or other kinds of behavior either through outright collusion or implicitly.
Defense lawyers say that it is an especially powerful theory when the government has credible evidence that market players could coordinate their customer strategies.
"Defendants who are well counseled know the risks are fairly high of losing in those situations," said Hill Wellford, an antitrust lawyer with the defense law firm Bingham McCutchen, who is not involved in the case.
The government's merger guidelines, which describe how regulators address mergers between rivals, outline circumstances in which coordinated effects are likely to occur, such as in markets where pricing is transparent, where barriers to the market are high and where market players have a history of coordination or collusion.
TAX CASE A PRECEDENT
The U.S. Department of Justice's Antitrust Division pursued the coordinated effects theory at a 2011 trial to stop H&R Block Inc's (HRB.N) acquisition of 2SS Holdings Inc, developer of the TaxACT digital tax preparation business. The case centered on the market for do-it-yourself digital tax software.
The market leaders were H&R Block, TaxACT and Intuit Inc (INTU.O), the maker of TurboTax. The government claimed that the merger would have created a duopoly between H&R Block and Intuit.
It also argued that TaxACT, which was the first to offer all federal taxpayers a free digital do-it-yourself product on its Website, had played a constraining force on the market and that if it disappeared, it would encourage H&R Block and Intuit to limit their free offerings.
H&R Block and TaxACT asserted that coordination was unlikely because pricing in the market is not transparent. But U.S. District Judge Beryl Howell in Washington, D.C., did not buy it and stopped the merger from going forward.
"To the contrary, the record clearly demonstrates that the players in the (digital do-it-yourself tax software) industry are well aware of the prices and features offered by competitors," Howell wrote.
The Federal Trade Commission was also able to stop a merger of two software companies specializing in estimating auto repair costs for insurance claims using the coordinated effect theory. In enjoining the merger between CCC Information Services Inc INBSGI.UL and Mitchell International Inc MTCHE.UL, which was announced in 2008, U.S. District Judge Rosemary Collyer found that the combined CCC/Mitchell company would likely be competing with only one other company.
"In a highly concentrated market, with stable market shares, low growth rates and significant barriers to entry, there are few incentives to engage in healthy competition," Collyer wrote.
In antitrust cases, the government often relies on economic modeling, which can be dry. But in cases in which prosecutors employ the coordinated effects theory, they often use internal documents from the defendants, which make a case more compelling and which some lawyers say should give defendants pause.
"You have to be extra confident in your trial team before you go forward," Wellford said.
In the government's complaint in the beer case, it cited AB InBev internal documents in which it acknowledged that Modelo had put "increasing pressure" on the company by not following its lead in increasing prices.
Under the proposed deal, AB InBev would sell Modelo's 50-percent stake in Crown Imports, its U.S. distributor, to Constellation Brands for $1.85 billion.
AB InBev has said that the transaction gives Constellation 100 percent ownership and control of that business. While AB InBev would serve as the supplier of Modelo brands, it said all decisions around marketing, distribution and pricing would be set by Crown. AB InBev could use this defense to try to bolster its case that the transaction does not fundamentally change the U.S. market.
The government claimed in its lawsuit that proposal was designed only to "avoid liability under the antitrust laws" and that it created a "facade of competition between ABI and its importer."
The government, in its complaint, quoted an ecstatic Crown CEO Bill Hackett who wrote to his employees after the deal was announced, "Our No. 1 competitor will now be our supplier.... it is not currently or will not, going forward, be ‘business as usual.'"
The use of internal company documents, such as emails, was also central to the government's trial victory over H&R Block's deal for TaxACT, said D. Daniel Sokol, a visiting professor at the University of Minnesota Law School.
"The DOJ finally understands a winning strategy for mergers," Sokol said. "There are some bad documents in this case. Bad documents are worth 10 economists in court."
(Reporting by Andrew Longstreth; Additional reporting by Martinne Geller, Olivia Oran and Diane Bartz; Editing by Howard Goller and Alden Bentley)