The DoJ Defends Cheap Beer

BudweiserAnheuser-Bush InBev’s (NYSE:BUD) Bud Light is the best-selling beer in America. AB InBev reported $39 billion in revenue last year, and is expected to report $39.8 billion this year, with 31.3 percent of its sales volume coming from North America. That’s 124 million hectoliters of beer.

Grupo Modelo, which sells Modelo and Corona Extra, exported 16.9 million hectoliters of beer in 2011. With their powers combined, they could control the American beer market with an iron fist, raising prices and snuffing out competition.

Investors are making great returns as markets roar higher. Join the party. Click here to discover our Feature Stock Pick now!

At least, that’s what the U.S. Department of Justice thinks. Four years ago, AB InBev, which already controls a 50 percent non-controlling stake in the Mexican company, announced its plans to pursue a total acquisition. The combined entity would put the famed Corona and Budweiser brands side by side, combining AB InBev’s 14 billion-dollar brand labels with Modelo’s three. Together they would control seven out of 10 top beer brands in the world.

But power corrupts, and the DoJ has filed an anti-trust lawsuit against the merger…

Corona Beer“The department said that the $20.1 billion transaction would substantially lessen competition in the market for beer in the United States as a whole and in 26 metropolitan areas across the United States, resulting in consumers paying more for beer and having fewer new products from which to choose,” reads a statement released by the DoJ.

The DoJ argues that since Americans spend $80 billion on beer every year, “even a small increase in the price of beer could result in billions of dollars of harm to American consumers.” Between the two of them, the companies control about 46 percent of the American beer market.

Understandably, the lawsuit was a punch in the face for the company and its investors. Shares were off about 5.8 percent on January 31 following the announcement.

But AB InBev wasn’t the only beer company taking a hit from the DoJ’s lawsuit…

Constellation Brands (NYSE:STZ) tanked over 17 percent after the announcement. One of the company’s primary revenue streams comes from Crown Imports, a joint venture it owns with Modelo. AB InBev’s proposed acquisition of Modelo would leave Constellation Brands with the entirety of Crown Imports, and one tremendous revenue river.

The arrangement was meant to ease pressure from anti-trust authorities, but it clearly wasn’t enough. The DoJ argues that Modelo, through Crown Imports, has always resisted annual price increases initiated by AB InBev. The merger would remove this behavior, and as a result AB InBev would raise its prices without substantial competitive pressure to lower them.

Constellation Brands, Inc. Comm Stock Chart - STZ Interactive Chart - Yahoo! Finance








Don’t Miss: Here’s Why Wal-Mart is Limiting Ammunition Sales.