February 1, 2013 / 3:15 PM / in 5 years

UPDATE 4-Modelo deal parties working on DOJ concerns -source

By Martinne Geller and Diane Bartz
    NEW YORK/WASHINGTON-Feb 1 (Reuters) - Anheuser-Busch InBev
SA, Grupo Modelo and Constellation Brands
Inc 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
    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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