Please ensure Javascript is enabled for purposes of website accessibility

Heightened Scrutiny Won't Stall Anheuser-Busch InBev's Buying Spree

By Rich Duprey - Updated May 15, 2017 at 9:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Latest acquisition will test Justice Dept commitment to keeping close tabs on the macro brewer,

Image source: Getty Images.

If you thought the Justice Dept.'s promise to keep close tabs on Anheuser-Busch InBev's (BUD 1.44%) attempt to sway the craft beer market would keep it from making more forays into the space, well, you'd be wrong. The mega brewer recently announced it would be buying yet another craft brewer, scrutiny be damned.

Carving out a craft beer plan

Earlier this month Anheuser-Busch said it would be buying Texas-based Karbach Brewing for an undisclosed sum, and would be folding it into its high-end business unit that focuses on craft and imported beers. 

Over the past few years, the brewer has purchased a dozen or so craft beer names including Goose Island Brewery, Four Peaks, and Breckenridge Brewery after having launched its own craft beer, Shock Top, to counteract the success of Molson Coors' Blue Moon. It also acquired several craft beer distributors and most recently bought the leading homebrewer supply house.

Yet all those acquisitions caught the attention of the Justice Department when it sought to acquire SABMiller in a $100 billion merger. The craft beer industry had complained that A-B's efforts were an attempt to drive craft competition from store shelves, and pointed to its agreements with the distributors to pay for their marketing expenses if they only carried A-B brands, or mostly did so.

Trust, but verify

In agreeing to let the Miller merger go through, the Justice Department was adamant in protecting competition, particularly for craft and imported beers. It said its settlement with Anheuser-Busch "prohibits ABI from instituting or continuing practices and programs that limit the ability and incentives of independent beer distributors to sell and promote the beers of ABI's rivals, including high-end craft and import beers."

Importantly, the regulator also said it was precluding Anheuser-Busch from making more distributor and brewer acquisitions, particularly of craft brewers, without first giving the deals a closer look for the impact they might have on industry competition.

As long as Justice doesn't find any problems with the acquisition from a competitive standpoint, the deal will likely get the green light, but is it likely that the Justice really won't find any problems?

Everything is bigger in Texas

According to industry site Brewbound, Karbach is currently only distributed in Texas and has ramped up production from 8,000 barrels in 2012 to 80,000 in 2016, and Anheuser-Busch says it wants to nearly double it to 150,000 barrels by 2019. The craft beer industry trade group Brewers Association points out that 57% of all craft breweries produce less than 15,000 barrels annually.

Despite that limited distribution area, A-B describes Karbach as one of the fastest-growing craft brewers in the country. It's also to be expected the macro brewer will distribute Karbach beyond the narrow confines of the Texas market it currently dominates, perhaps even nationally. The purchase would certainly give Anheuser-Busch undue influence of the Texas market and it might end up control others that the craft beer is eventually sold into, causing the Justice Dept. to look askance at the acquisition.

Image source: Getty Images.

Constellation Brands (STZ 1.88%) recently followed that path after buying San Diego-based Ballast Point Brewery for $1 billion. The craft brewer has been enjoying rapid expansion after joining Constellation's distribution network and in its latest quarterly report the beer, wine, and spirits distributor said Ballast Point was enjoying double-digit depletion growth as its beer became more widely available (depletions are sales from distributors to retailers, and are considered a reliable proxy for consumer demand).

Brewing up trouble

Yet it's an interesting time for A-B to be making this acquisition, beyond probable Justice Department scrutiny. The craft beer market is slowing. While it has benefited from double-digit growth for years, this year the Brewers Association expects it to fall to just 8% growth, though a lot of that has to do with sales slowing at the biggest names in the business, including Boston Beer, New Belgium Brewing, and Sierra Nevada. Take them out and sales are still growing at double-digit percentages.

Anheuser-Busch InBev's purchase of homebrew supplies shop Northern Brewer has attracted Justice Department interest and this latest deal will, too. The regulatory agency has said it doesn't matter if the deals are individual or in the aggregate, too much influence could sink them. Coming just two months after agreeing to being monitored, it's a cheeky move by the big brewer, but one that might cause it some trouble.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Anheuser-Busch InBev SA/NV Stock Quote
Anheuser-Busch InBev SA/NV
BUD
$55.05 (1.44%) $0.78
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$238.91 (1.88%) $4.41
Molson Coors Beverage Company Stock Quote
Molson Coors Beverage Company
TAP
$52.17 (1.83%) $0.94
The Boston Beer Company, Inc. Stock Quote
The Boston Beer Company, Inc.
SAM
$327.93 (-0.39%) $-1.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.