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A-B InBev’s NYSE:BUD Modelo PINK:GPMCS merger is “Up in the Air”

TAP, STZ, SF, T

The only thing may be certain about Anheuser-Busch InBev’s proposed $20-B quest to fully own Mexican brewer Grupo Modelo is, nothing is certain.

A week of leaks and rumors about the big deal have the beer industry spinning, and a growing number of Wall Street analysts wonder if the merger may yet fall over.

The noise comes as lawyers at the US Justice Department weigh whether the deal which would give A-B InBev control of roughly 52% of all beer sold in the USA violates federal antitrust laws.

To pre-emptively address those concerns when it announced the deal in June, A-B InBev signed a pact to import Modelo products such as Corona to the US through a 3rd party, New York-based Constellation Brands NYSE:STZ. The idea is to create an extra buffer in the American market, but the fine print on the agreement may not be enough to satisfy the US regulators. The concern is that A-B InBev could gain undue control over the price of beer in the USA.

Antitrust concerns have dogged the deal since the start. They heated up last Monday with a New York Post report that said the US Justice Department will seek “major concessions” before approving the deal.

Those may include ordering the brewer to hire a 3rd party to brew, not just import, Modelo products for the US market, as it did with Labatt when InBev bought Anheuser-Busch in Y 2008.

Next came a report from The Capitol Forum, a Washington-based antitrust newsletter that has followed the deal closely, saying the Justice Department was planning to ask A-B InBev to sell “production assets” perhaps the massive Piedras Negras brewery in northern Mexico where much US bound Corona is made, and was preparing to sue to block the deal if the brewer refused. “The least likely outcome, in our opinion, is that DOJ allows the deal to go through as is,” the newsletter wrote.

Then came news in the other direction, a news report that the brewer and the Justice Department were talking about tweaks to the Constellation deal, but not a brewery sale.

Then there was a report that said A-B InBev viewed selling Piedras Negras a “dealbreaker,” a stance that could put the brewer and the Justice Department at odds.

On the record, no one is saying much, a Justice Department spokeswoman declined to comment, the brewer repeated its long-held position that the deal will close in Q-1, that being the end of March.

“We continue to think litigation is unlikely,” wrote Mark Swartzberg, a beer industry analyst at Stifel Nicolaus & Co. NYSE:SF. He points out that there’s no likely buyer for Piedras Negras and suggests that the deal will be approved with “comparatively small” concessions by A-B InBev.

Antitrust experts note that the Justice Department has become more aggressive under US President Obama, pointing to its Y 2011 move to block AT&T’s NYSE:T, purchase of Germany’s T-Mobile. They note that the government reportedly has 9 attorneys working on the Modelo case, a sign that it perhaps is set for a struggle.

In addition to A-B InBev, Modelo and Constellation, Justice Department lawyers have been interviewing beer wholesalers about competitive aspects of the deal, according to people familiar with the process. They have sat down, too, with brewing rivals like MillerCoors NYSE:TAP and Yuengling.

The Brewers Association, a trade group for craft brewers, has hired a well-connected Washington law firm to make sure its voice is heard too.

A-B InBev has talked openly about consolidating its large and farflung network of US wholesalers as a way to boost profits and efficiency. Some wholesalers, many of whom own what amount to lucrative regional monopolies, do not welcome such talk, some have.

Craft brewers worry about this consolidation, too, because they need the distribution networks set up by A-B and MillerCoors to bring their beer to store shelves. Some worry that the big brewers hope to cut them out and replace independent beers with their own craft labels.

While neither of those issues is directly related to A-B InBev’s purchase of Modelo, they’re probably fueling concern about the deal, said Harry Schuhmacher, publisher of trade magazine Beer Business Daily.

Beer industry watchers say the Justice Department’s antitrust lawyers may tighten the brewer’s agreement with Constellation in a way that protects wholesalers and craft brewers, and helps to keep a variety of beer on the shelves. That remains to be seen. Stay tuned…