UPDATE 3-Illinois blocks Anheuser bid for distributor

Wed Mar 10, 2010 6:16pm EST

* Illinois blocks Anheuser takeover bid of distributor

* Cites "three tier" system

* Anheuser says to challenge ruling in federal court (Adds comments from Anheuser, trade publication, byline)

By Martinne Geller

NEW YORK, March 10 (Reuters) - The Illinois Liquor Control Commission blocked a bid by Anheuser-Busch InBev NV's (ABI.BR) U.S. business to take over Chicago-area distributor City Beverage.

In a declaratory ruling on Wednesday, the commission said that Anheuser-Busch Cos Inc, part of Belgium-based Anheuser-Busch InBev, is a "nonresident dealer" of alcoholic beverages and that the Liquor Control Act does not specifically allow a nonresident dealer to also be a distributor in the state.

The commission's ruling cites Illinois' "three tier" distribution system, which requires alcoholic beverages in U.S. states to be sold to a wholesaler or distributor, which then sells them to stores, bars or restaurants.

Anheuser-Busch InBev, the world's largest brewer with brands ranging from Budweiser to Stella Artois, said in a statement that it strongly disagrees with the decision, and that it is pursuing other legal options, including filing a lawsuit on Wednesday in federal court in Chicago to challenge the constitutionality of the decision.

The commission said preserving the three tier system is "a fundamental objective" of the state legislature as a matter of public policy and that it "protects against vertical monopolies and economies of scale that would lead to the introduction of cheap alcoholic liquor into the marketplace".

Anheuser-Busch General Counsel Gary Rutledge said "a brewer holding a (distribution) license is no threat to the three-tier system whatsoever, and any statement otherwise is simply a misunderstanding of the three-tier system."

He said the commission's position is that Illinois law allows in-state brewers to hold distribution licenses, just not out-of-state brewers.

Anheuser-Busch, through its affiliate Wholesaler Equity Development Corp, proposed to buy the 70 percent stake in City Beverage that it does not already own. It has held a 30 percent interest in the distributor since 2005.

Because Anheuser has had the stake since 2005, the commission said it would renew City Beverage's current distribution licenses upon their expiration.

Yet if the commission learns that Anheuser or any of its affiliates has bought any additional stake in City Beverage, it will then consider the licenses to be in violation of the liquor control act and subject to revocation or refused renewal, the ruling said.

Beer Business Daily publisher Harry Schuhmacher said it was "kind of a split ruling".

"AB can't own a controlling interest, but it can own a 30 percent interest," Schuhmacher wrote on Wednesday. "It leaves a hole in the boat, as they say." (Reporting by Martinne Geller; editing by Gerald E. McCormick, Andre Grenon and Carol Bishopric)