Beer divestment transferred to a competitor

1.    Introduction

The National Commission for the Defense of Competition and the Secretary of Domestic Trade (the “Antitrust Authorities”) authorized last March 31, 2008, the transfer of Industrias Cerveceras S.A. (“ICSA”) to Compañía Industrial Cervecera S.A. (“CICSA”) (local producer of Heineken and Budweiser beers)[1]. ICSA is a company formed in 2007 to acquire some of the assets that were divested as a consequence of the transaction by which Companhía de Bebidas Das Americas (“AmBev”) acquired the control of Cervecería y Maltería Quilmes S.A.I.C.A. (“Quilmes”) (the most important Argentine beer producer). The authorization to this transaction is yet more evidence that the Antitrust Authorities have modified their views on imposing divestments as it implies a modification of the divestment to the AmBev/Quilmes transaction that took nearly 5 years to be completed.

2.    The original divestment

The acquisition of Quilmes by AmBev (the Brazilian producer of Brahma Beer) was announced in 2002. On January 2003 the Antitrust Authorities subordinated the approval of the transaction to the compliance of certain conditions which included the sale to a new entrant in the beer market (with no previous activities in such market) of (i) the beer brands Imperial, Bieckert and Palermo and the option to acquire the Andes brand; (ii) a beer plant located in Lujan, Province of Buenos Aires; and (iii) distribution facilities for a maximum term of 7 years. The divestment also requested the sale or lease of a malt plant to a different candidate.

The compliance of the divestment was long delayed due to different challenges that it suffered, the most important being the challenge made by CICSA (an amparo proceeding requesting the unconstitutional declaration of the divestment). Although this challenge was finally rejected by the Supreme Court of Justice, it delayed the whole process.

On December 12, 2007, the Antitrust Authorities finally authorized ICSA to acquire the brands Imperial, Bieckert and Palermo, the beer plant located in Lujan and the execution of a distribution agreement with Quilmes for a term of 2 years. ICSA qualified as a new entrant into the beer market. In approving the transaction, the Antitrust Authorities considered the business plan of ICSA by which this company could become the fourth competitor in that market (which was the main objective of the Antitrust Authorities in forcing this divestment).

3.    The new transaction

However, one year after the divesture was completed the Antitrust Authorities authorized the transfer of the control of ICSA to its competitor CICSA. This last company is the producer of the beers Budweiser and Heineken and is considered as the second most important competitor in the beer market.

During the approval process the Antitrust Authorities required ICSA to grant explanations on the reasons why the original business plan could not be complied with and therefore the reasons why the sale to CICSA was decided. ICSA explained that although the basic targets of the business plan and the market share were complied with, market characteristics made it very difficult for them to compete.

According to the Antitrust Authorities, in the relevant market for beers (only considering the sales by beer producers) during the year 2007, Quilmes was the strongest competitor with 73.2%. The Antitrust Authorities further indicated that, in terms of sales, CICSA was the second one with 16.29% and ICSA had a 4.83%. With the transaction, the invoicing of CICSA would represent 21.12 % of the amount invoiced by the players in this relevant market.

The Antitrust Authorities decided to approve the transaction because they considered that the transaction would strengthen the position of the second competitor and the transaction would also enhance CICSA geographically and in efficiency. With the acquisition of the Lujan plant, CICSA would be able to produce and distribute beer directly in the Province of Buenos Aires (it currently only operates plants in the Provinces of Santa Fe and Salta), saving on transportation costs. Additionally, CICSA would start producing and distributing the brands Bieckert, Imperial and Palermo in Santa Fe and Salta giving those brands countrywide distribution and scope (as they were local brands without countrywide distribution).

4.    Conclusion

This transaction clearly demonstrates that the divestment imposed by the Antitrust Authorities in 2003 was not adjusted to market needs.

With this recent decision, the Antitrust Authorities confirmed that divestment should not be unilaterally imposed and rather must be negotiated with the parties. After the several challenges that this divestment had experienced, the Antitrust Authorities modified their form of imposing divestment conditions. Currently, when material and difficult transactions from the antitrust point of view are filed for approval, the Antitrust Authorities request the parties to offer divestments that are usually negotiated. This transaction demonstrates that the path the Antitrust Authorities are currently using is the correct one.