Yesterday, in a joint filing, ABI InBev and the Department of Justice requested that the legal proceedings between the two parties be suspended until March 19. It’s a positive development, as it means the parties have been and continue to work toward a negotiated end to the dispute. We have had no doubt that the parties were talking and at this point we suspect the discussions are solely focused on getting the DOJ comfortable with the new deal structure. Our view is that the transaction as currently contemplated addresses substantially all of the concerns expressed by the DOF in its initial filing.
There was some speculation yesterday that the DOJ was uncomfortable with STZ as the buyer of the Grupo Modelo assets, a concern that was expressed in the initial filing. Justice is likely worried about internal documents that suggest that STZ would be likely/willing to raise prices on the Modelo brands, a strategy that represents a break with the recent actions of Modelo.
We see these concerns as misplaced, to be kind and idiotic, to be truthful, for the following reasons:
- Modelo’s pricing strategy (share gains vs. pricing) can be changed at any time, and isn’t written in stone
- STZ had no incentive to manage the brands for anything other than short-term profit given the prior structure and time frame of the Crown JV
- There is no guarantee that any other buyer would behave in substantially different fashion than the way DOJ assumes STZ would act
- Regardless, the idea that the pricing actions of Crown have represented some sort of braking mechanism on the other 94% of the industry strikes us as factually incorrect
We continue to believe that it is highly likely the new transaction gains DOJ approval and we view yesterday’s news as supportive of that position.
HEDGEYE RISK MANAGEMENT, LLC