China – MOFCOM’s Recent Decision On Anheuser-Busch InBev’s Acquisition Of SABMiller – A Comparison Of The US And The EU Decision.

 

21 August, 2016

 

On July 29, the PRC Ministry of Commerce (“MOFCOM”) approved the Anheuser-Busch InBev (ABI)’s acquisition of SABMiller (“Transaction”) conditional on SABMiller’s divestiture of its 49% stake in China Resources Snow Breweries Co., Ltd (“CR Snow”) to China Resources Beer (Holdings) Company Limited (“CR Beer”). This is the second time that MOFCOM has adopted the “fix-it-first” solution in its decision.

 

SABMiller entered the Chinese market in the year of 1994 by forming the joint venture CR Snow with CR Beer. Besides holding stake in CR Snow, SABMiller also sells a small amount of malt liquor. The MOFCOM’s decision requires ABI to sell essentially the entire SABMiller beer business in China.1 

 

To better understand MOFCOM’s decision, it is essential to understand the terms of MOFCOM’s 2008 decision on InBev’s acquisition of Anheuser-Busch. Conditions included prohibiting ABI from (i) increasing its shareholdings in Zhujiang Brewer, and (ii) acquiring any shareholdings in CR Snow2. On August 25, 2015, the MOFCOM approved ABI’s shareholding increase in Zhujiang Brewer from 25.62% to 29.99% finding that such shareholding increase would not change the controlling structure of Zhujiang Brewer. Nevertheless, with respect to this Transaction, the MOFCOM refused to allow ABI to acquire any shareholdings in CR Snow originally held by SABMiller.

 

Before MOFCOM’s decision, the EU Commission and the US Department of Justice (“DOJ”) had approved the Transaction with similar constructional conditions. ABI adopted the strategy of offering extensive divestiture solutions in various jurisdictions in order to facilitate the merger review process. On the agency side, DOJ mentioned in its news release that it had cooperated with its counterparts in a number of jurisdictions, including the EU and China.3 The table below illustrates some similarities among the decisions issued by the three agencies: 

 

 

 

Additionally, the MOFCOM’s decision reveals some differences between MOFCOM and its US and EU counterparts in certain considerations, such as the market definition, special concerns on possible harm to distributors, its fix-it-first solution and the connected merger review of CR Beer’s acquisition of CR Snow.

 

I. Market definition

 

As in previous cases, the EU Commission has accepted that the supply of beer to the on-trade sector (i.e. pubs, clubs and restaurants) should be examined separately from the supply of beer to shops and other retail outlets (off-trade), and that the geographical scope of competition is mostly national. In some cases when necessary, the EU Commission has also examined whether the deal could raise competition concerns in relation to a narrower market for premium beer.6 In the DOJ’s complaint against this Transaction, the DOJ examined the geographic market of each Metropolitan Statistical Area (“MSA”). Although the DOJ mentioned the possibility of further dividing the beer market to “sub-premium, premium and high-end” categories, it only examined the combined market shares of the parties in each MSA in the larger product market of beers including all price levels. In the MOFCOM’s decision, the MOFCOM divided the beer market into the popular and the medium-high grade beer markets using the benchmark of RMB 5 per 500ml (approximately USD 0.75 per 500ml). The MOFCOM examined the combined market shares of the parties in each provincial market for the narrower product markets of popularization and medium-high grade respectively. This may lead to higher combined market shares in each provincial market. In addition, unlike its western counterparts, MOFCOM generally prefers precise market definitions rather than fuzzy or open-ended market definitions. That is why it provided a precisely defined market definition for this Transaction and calculated the parties’ market shares based on the market definition.

 

II. Special concerns on harm to distributors

 

In its competition analysis, the MOFCOM considered four factors, including (a) the deal will further enhance ABI’s market controlling power, (b) the deal between the two closely competing beer makers will lead to reduced competition, (c) the deal will increase barriers to entry, and (d) the deal will hurt downstream distributors. Unlike the DOJ and the EU Commission, which mainly focused on the likelihood of price increases in the already transparent beer market, the MOFCOM’s decision analyzed the market structure (or market shares) and possible harm to downstream distributors. The MOFCOM found that most beer distributors are small in scale with limited coverage, and lack significant bargaining power. After the Transaction, due to reduced competition between ABI and CR Snow, the distributors’ bargaining power will be further weakened. The distributors would have less access to ABI’s incentive programs, and thereby their interests will be harmed.

 

III.Fix-it-first and the connected merger review of CR Beer’s acquisition of 49% shareholdings in CR Snow

 

Fix-it-first is one of the structural remedies used in merger control review, where the parties can restructure the transaction or sign an agreement with the future buyer to divest assets before the implementation of the transaction. In the US, the DOJ uses the fix-it-first remedy more frequently compared to the Federal Trade Commission. If the proposed fix-it-first remedy eliminates the DOJ's antitrust concerns, there would be no need for DOJ to issue a consent decree or file a case. In the EU, if the EU Commission approves the “fix-it-first” proposal, the Commission will issue a decision conditional on the proposal.7 The MOFCOM’s has adopted a “fix-it-first” remedy in its decision, and the MOFCOM followed a model similar to the EU by issuing a decision attached with conditions. CR Beer signed the purchasing agreement of 49% stake of CR Snow in the pre-acceptance review period before the MOFCOM officially acknowledged the completeness of the filing documents and accepted the case.

 

Unlike the EU, where the buyer doesn’t need to file another merger notification for the “fix-it-first” transaction, CR Beer, which is the buyer of the 49% stake of CR Snow, filed a separate merger notification with the MOFCOM. The two notifications were reviewed in parallel by the MOFCOM. Approving the Transaction conditional on CR Beer’s proposed acquisition of CR Snow shows that the MOFCOM does not have competition concerns on CR Beer’s acquisition. Therefore, the merger notification made by CR Beer regarding its acquisition of CR Snow should be approved by the MOFCOM without conditions.

 

The first time when the MOFCOM approved a transaction subjecting to a fix-it-first remedy was on November 25, 2015 in the NXP/ Freescal case. NXP proposed the relevant divestiture druing Phase I of the MOFCOM’s review period, but had not sign the agreement with the buyer until the case entered into the extended Phase II. In its decision, MOFCOM requires that the closing of the divesting transaction should be the prerequisite of closing the NXP/Freescal transaction.8 The MOFCOM seems to have adopted the fix-it-first remedy frequently in its recent decisions. This shows that the MOFCOM became more and more confident in using various remedy tolls and that the MOFCOM considers the fit-it-first solution as a good way to ensure the effectiveness of the relevant structural remedies. 

 

1 See MOFCOM’s decision on ABI’s acquisition of SABMiller, available at http://fldj.mofcom.gov.cn/article/ztxx/201607/20160701369044.shtml. 

2 See MOFCOM’s decision on InBev’s acquisition of Anheuser Busch in 2008, available at http://fldj.mofcom.gov.cn/article/ztxx/200811/20081105899216.shtml. At that time, ABI’s shareholdings in Zhujiang Brewer was 28.56%. 

3 See DOJ’s news release, available at https://www.justice.gov/opa/pr/justice-department-r equires-anheuser-busch-inbev-divest-stake-millerco ors-and-alter-beer 

4  See DOJ’s Complaint, available at https://www.justice.gov/opa/file/877506/download.

5  See EU Commission’s press release at http://europa.eu/rapid/press-release_IP-16-1900_en.htm. 

6 See “Commission clears acquisition of Beck's by Interbrew”, http://europa.eu/rapid/press-release_IP-01-1499_en.htm. 

 

 

David QI , Partner, Jun He

qid@junhe.com