China: China antitrust authority’s approval of AB InBev and SABMiller merger may significantly affect future transactions
The Chinese Ministry of Commerce (MOFCOM), China’s antitrust enforcement agency for mergers, has conditionally approved the USD108 billion acquisition of SABMiller PLC by Anheuser-Busch InBev NV, in a Decision published July 29, 2016.
The MOFCOM Decision requires divestiture of the 49% interest in China Resources Snow Breweries currently held by SABMiller to the other owner, China Resources Beer. This not surprising; in a 2008 MOFCOM decision, AB InBev was specifically prohibited from acquiring any interest in Snow Breweries, as one of the conditions MOFCOM imposed in InBev NV’s acquisition of Anheuser-Busch. However, this is the first time a MOFCOM published decision has distinguished relevant product markets based on mass brands versus mid-to-high end brands and defined the geographic market as local provinces instead of all of China.
AB InBev made the notification of this transaction on March 8, and the case was initiated on March 29. On March 14, InBev proposed to divest SABMiller’s 49% stake in Snow Breweries to China Resources Beer, the 51% owner. AB InBev may have proposed the remedy even before the case was accepted by MOFCOM because the combined entity would have to divest the interest anyway under the 2008 MOFCOM decision. After several rounds of negotiation, MOFCOM agreed that the remedy proposal was sufficient to address its competition concerns. The filing process took around five months from the filing date and was cleared with conditions in the third phase of MOFCOM merger review.
In its Decision, MOFCOM defined the relevant product market as "beer." However, MOFCOM segmented the beer market into "mass brands beer" and "mid-to-high-end brands beer" based on selling price, with RMB 5 yuan per 500 ml as the line between them. This Decision represents the first time MOFCOM publicly has distinguished between high-end and low-end relevant product markets based on selling price.
For the relevant geographic market, MOFCOM determined that competition among breweries usually takes place at a provincial level within China, in light of low selling prices and high transportation costs. This represents the first time that a MOFCOM published merger decision has defined a geographic market as narrower than all of China national level. Meanwhile, MOFCOM pointed out that the geographic coverage of sales of beer has been expanding due to transportation improvements, and therefore it also analyzed the national market.
The Decision notes that the China national beer market is highly concentrated, with the top 5 players serving 80% of the market. Snow Breweries and AB InBev, the first and third largest players, have a combined share of 43% in beer, 41% in mass brands and 52% in mid-to-high-end brands. The combined entity would have substantial market shares in both product segments in many individual Chinese provinces, in some with combined market shares of more than 70%.
MOFCOM concluded that the transaction would eliminate competition between two significant and close competitors, raise entry barriers by providing increased control over sales channels, and weaken the bargaining power of distributors, which ultimately would harm Chinese consumers. The Decision thus follows in a long line of MOFCOM precedents that place great importance on the likely impact of a transaction on downstream domestic customers and distributors and shifts in relative bargaining power. The Decision does not report any more detailed analysis by MOFCOM as to the likelihood of anticompetitive effects from increased concentration or bargaining power or control over sales channels, apparently assuming the effects from those developments.
The AB InBev/SABMiller Decision is the first published Chinese merger decision in which MOFCOM has distinguished between high-end and low-end products based on selling price for the purpose of market definition. This approach of market segmentation may significantly affect future transactions, especially those involving foreign brands. For most products, foreign companies tend to offer higher quality and better service at higher prices, while most domestic Chinese competitors offer commodity or generic products and have to compete on price. The beer decision thus may lead to narrower "high end" market definitions in which foreign suppliers are attributed higher market shares than in the overall product category. Similarly, MOFCOM’s assessment of competition in local markets instead of a national or global geographic market may affect the analysis in retail and other industries where shares may vary across provinces and cities in China. Corporations considering future mergers involving China should take into account quality and local market differences and concentration levels in evaluating the potential competitive effects of their deals.
07 August, 2016
