While surfing for some light weekend reading, I stumbled across an interesting article that appeared in the Review of Industrial Organization back in 2005 (yes, yes, I need to get out more). The title is “The Supreme Court and Beer Mergers: From Pabst/Blatz to the DOJ–FTC Merger Guidelines.”
At a minimum, it is an interesting retrospective on the history of the beer industry in the U.S., with mention of some venerable beer brands (Hamm’s, anyone?).
The paper argues, compellingly, I believe, that the review of mergers and associated antimerger rules needs to progress as “economic understanding” progresses. Word of warning, the article is bone dry, so a cup of coffee next to your computer is very much in order. On the plus side (for you), I had to read the whole thing (yay me?). It was also written prior to the merger of Anheuser-Busch and InBev, but the findings are still very much relevant. Let’s get started.
“The first antimerger action in the beer industry was taken by the Antitrust Division in 1958 against the industry’s leading firm, Anheuser-Busch. Anheuser-Busch had purchased the Miami brewery of American Brewing Company. The government successfully argued that this merger would eliminate American Brewing as an independent brewer and end its rivalry with Anheuser-Busch in Florida.”
What’s interesting here is that the government appears to have a long history of thinking (and acting) locally when examining beer markets. What is also interesting is that Anheuser-Busch completely abandoned acquisitions as a means to growth for over two decades subsequent to this unsuccessful deal. Instead, Anheuser-Busch spent its time and capital building efficient brewing capacity across the country (Florida included). Anheuser-Busch’s market share leadership has been undisputed since 1957.
“Bottom line: mergers have not made much of an imprint on the structure of the brewing industry, and have not resulted in market power for merging partners. The most active merging firms, Stroh and Heileman, eventually failed. Much of the increase in concentration in the past three decades was due to the growth of Anheuser-Busch, Miller and Coors, whose expansion has been largely internal.”
The DOJ has taken the beer industry before the United States Supreme Court twice - U.S. v. Pabst (1966) and U.S. v. Falstaff (1973). In both cases, the mergers were seen as anti-competitive, for different reasons in each case, but thinking that largely reflected the belief that mergers that took place in an industry with an existing trend toward industry concentration were anti-competitive.
“The mid-1970s saw the beginnings of a radical shift in antimerger enforcement doctrine – a major change in what Bork (Judge Robert H. Bork) called “the economic rules.” In response to the work of Bork and others, the Chicago School of economics gained ground, and its focus on economic rigor in legal reasoning and an emphasis on consumer welfare as the goal of antitrust enforcement had a significant influence on antitrust law.”
This change in thinking ultimately led to the adoption of the DOJ-FTC Horizontal Merger Guidelines, where the focus shifted from simple concentration of market share to a discussion of “market power”. Market power was defined as “the ability profitably to maintain prices above competitive levels for a significant period of time.”
“Contrary to the precepts of Pabst and Falstaff, under the Guidelines, ‘although large market shares and high concentration by themselves are an insufficient basis for challenging a merger, low market shares and concentration are a sufficient basis for not challenging a merger.”
The paper concludes with the following:
“Increases in concentration in brewing are neither the result nor the cause of market power. The reasons, rather, are benign: the exploitation of scale economies and the demise of suboptimal capacity; new or superior products; changes in packaging and marketing methods; poor management on the part of some firms; and the strategic use of product differentiation. As a consequence, Anheuser-Busch, Miller and Coors no longer face an array of robust domestic brewers. Brands like Schlitz, Pabst, Old Style, Stroh, Ballantine, Schaefer, Falstaff, Olympia, Rheingold, Ruppert, Blatz, Lucky Lager, Hamm’s, and the firms that produced them, are gone or are shadows of what they once were. But the big three domestic brewers now face significant import competition, in some cases from large brewers with operations in many countries, and significant competition from specialty brewers.”
We would add to that last point that brewers are also facing competition from wine and spirits makers, as beer continues to lose share of liver as a multi-year trend. The DOJ gave little thought to the substitutability of these products.
Interesting stuff, and intuitively compelling. As we pointed out in our prior note, we believe a critical and honest examination of the fact pattern in the proposed Anheuser-Busch InBev/Modelo transaction would support the notion that the transaction be allowed to proceed as contemplated. The idea that Modelo’s 50% control (through Crown) of 6.5% of the U.S. market has been some mitigating factor on pricing across the rest of the 94.5% doesn’t exactly ring true to us, particularly in light of what has been an extraordinarily benign pricing algorithm throughout history.
Further, we don’t believe that the DOJ gave any credit to the indirect nature of the control that ABI will have over Crown, preferring to call it a façade. We believe that the parties are talking, and will continue to talk. Both STZ and BUD make sense when the deal gets done, with STZ seeing the greater upside potential in the near-term, but also more downside in the event of incremental negative news flow.
Enjoy your Sunday,
Rob
Robert Campagnino
Managing Director
HEDGEYE RISK MANAGEMENT, LLC
Matt Hedrick
Senior Analyst
