As if Craft Brew Alliance's (NASDAQ:BREW) effort to be acquired by Anheuser-Busch InBev (NYSE:BUD) hasn't been difficult and convoluted already, the Justice Dept. is throwing another wrench into the machinery by requesting more information about the pending buyout.

Although such requests aren't rare, and deals can still go through afterwards, it indicates antitrust regulators have found areas of concern regarding competition that could delay the acquisition -- or derail it altogether.

A can of Kona beer and a Kona hat

Image source: Craft Brew Alliance.

A winding path to get here

The acquisition of Craft Brew Alliance by the mega brewer has been a long time coming, rooted in a master distribution agreement forged between the two brewers back in 2016 that gave Anheuser-Busch a 31% stake in the craft brewer.

While the agreement gave Craft Brew Alliance access to Anheuser-Busch's massive distribution network, including assistance in international markets, which Craft Brew has begun utilizing in Brazil, it also gave the mega brewer the right to make a "qualified offer" for the owner of the popular Hawaiian-based Kona Brewing at various times over the subsequent years at an escalating price point.

The last opportunity to make an offer came last August, and Anheuser-Busch passed it up, opting instead to pay a $20 million fee rather than paying $24.50 per share. While it seemed Craft Brew Alliance would remain independent, A-B came back in November with an offer to buy out the brewer for just $16.50 per share. Although this was much reduced from the qualified offer price, it was still a respectable offer considering the beer industry's situation. 

Craft Brew accepted and the deal has a tentative closure date of Nov. 11, 2020, though it can be extended twice to as far as May 11, 2021. They may need every day of it.

Taking a closer look

Craft Brew Alliance filed a notice with the SEC saying Justice had requested additional information and documents about the merger from both brewers, a process known as a second request. 

Both companies had filed the documents required under the Hart-Scott-Rodino antitrust act with the Federal Trade Commission and Justice on Dec. 6, but Anheuser-Busch ended up withdrawing its paperwork and then refiling it on Jan. 6. A month later, it got the second request notice. The FTC says such requests are made because an initial review of a merger deal "raised competition issues."

Once the brewers submit the necessary new documents, the clock starts ticking and the FTC has 30 days to make a decision. It can close the case, allowing the deal to go through; it can negotiate a settlement with the parties; or it can sue to block the merger.

Brewing up a big lead

Any of the outcomes are possible with this deal. As Anheuser-Busch has owned almost a third of Craft Brew Alliance for years, their relationship is a known quantity that shouldn't be materially altered by the acquisition. Yet the nature of the beer market has changed markedly since 2016.

Craft beer sales, while still growing, are running along at low single-digit rates due to changing consumer tastes. While Craft Brew Alliance hasn't been a barn burner, its Kona brand actually has grown substantially as part of the brewer's Kona+ strategy to focus most of its marketing on the flagship brand. Kona is the only brand that's growing sales and depletions, or sales to distributors, though Craft Brew's recently acquired regional breweries also collectively saw gains. 

The Kona Big Wave beer enjoyed 17% depletions growth in the third quarter, and market research firm IRI says the beer's off-premise dollar sales rose nearly 17% in 2019 to almost $30 million.

Considering the dozen or so craft beer acquisitions Anheuser-Busch previously made, regulators may be concerned there is too much of the market being concentrated in its hands, and it may want it to divest some brands before proceeding. The mega brewer might be reluctant to do that because it sees its craft segment, what it calls its high-end portfolio, as a strong candidate for future growth.

Worth the wait

So regulators might say no to the deal because of it, and Anheuser-Busch might call it off because it doesn't want to shed any of the brewers it already owns. If the deal doesn't go through, Anheuser-Busch would have to pay Craft Brew Alliance a $15 million termination fee.

The second request isn't a warning sign, per se, as anything Anheuser-Busch touches will automatically come under closer scrutiny because of its acquisitive history, but it's another twist in an already winding road.