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USA, New York: A big piece of a proposed US$11 billion merger to create the world's largest brewer is now in the hands of Judge Deborah Batts, Dow Jones said on April 29. The New York federal judge heard final arguments on April 28 from Fomento Economico Mexicano SA (Femsa), which is seeking an injunction to block the transfer of its U.S. beer distribution network to Brazilian heavyweight Companhia de Bebidas das Americas SA (AmBev).

The U.S. network, which carries such popular Femsa brands as Tecate, Dos Equis and Sol, represents an important part of the planned tie-up of Belgium's Interbrew SA and AmBev unveiled March 3. Under the terms of that deal, AmBev agreed to swap Interbrew 57% of its equity in exchange for Interbrew's North American assets, including Labatt Brewing Co. of Canada, 70% of Labatt USA, and 30% of Femsa's beer unit.

"You'll hear from me," said Batts in a Manhattan courthouse at the end of a final hearing that lasted almost four hours, following two earlier hearings that began last Thursday.

Femsa's lawsuit was filed on behalf of Wisdom Import Sales Co., which represents Femsa's 30% interest in Labatt USA, a distribution network headed by Femsa and Interbrew, Europe's second-largest brewer. Femsa, Mexico's No. 2 brewer, is arguing the transfer of Labatt USA to AmBev can't be carried out without Wisdom's approval - an approval it's not prepared to give at this time.

A lawyer for Interbrew maintained on April 28 that Labatt USA's corporate statutes only give Wisdom veto rights on important decisions that are carried out by Labatt USA or its subsidiaries - not any decisions made by affiliates higher up the corporate ladder at Labatt Brewing Co. of Canada or Interbrew. "The fine points of agreements ought to be honored," insisted Stuart Meiklejohn, an attorney at Sullivan & Cromwell LLP.

Meiklejohn added that Femsa isn't being held hostage by an unwelcome partner because the Mexican company will have the right to exercise an escape clause after the merger between Interbrew and AmBev is completed and control of Labatt USA is transferred to Brazil's dominant brewer.

But Stephen Neuwirth, representing Wisdom, argued it would be easier to unravel Femsa's stake in Labatt USA before the merger is completed instead of afterwards. Once "the eggs are scrambled," he said, it's difficult to " unscramble the eggs." He added that there is plenty of language in various documents to support Wisdom's claim that it has a veto right in any transaction affecting Labatt USA's ownership structure. "Documents sometimes are our best witnesses because documents don't lie," said Neuwirth of Boies, Schiller & Flexner LLP.

Judge Batts will now have to sift through those documents before deciding whether to halt the Labatt USA portion of the Interbrew-AmBev merger by granting an injunction or to throw out Femsa's lawsuit. While lawyers from both sides said after Wednesday's hearing that it's unclear how - or when - Batts will rule on the dispute, plenty of other things came to light during the past week's testimony.

It has been widely known for some time that Femsa and Interbrew had a strained relationship even before the deal between Interbrew and AmBev was announced last month. Femsa had taken Interbrew to court in the U.S. beforehand to block the Belgian company's attempt to distribute its Beck's brand through Labatt USA, with Femsa arguing the arrangement would hobble efforts to market its own brands.

But lawyers revealed during hearings that Femsa and Interbrew reached an agreement in principle in February, under which the Mexican company would have sold its stake in Labatt USA to the Belgian brewer and replace a 99-year distribution pact with a temporary arrangement allowing Interbrew to distribute Femsa's brands for a few more years. The deal hit a snag, though, as Femsa pushed for a non-compete clause in its Mexican market before talks were eclipsed by the Interbrew-AmBev pact.

Lawyers also disclosed that Femsa and AmBev held preliminary discussions on a potential merger for about a week in 2000, before shutting those talks down. Many on Wall Street think Femsa is set to exit its partnerships with Interbrew and is using the injunction proceedings to try and win sweeter terms by holding up the merger instead of exercising its opt-out rights after the deal is completed.

Femsa also could continue to pressure the merged Interbrew-AmBev entity for better exit terms after the merger goes through by gumming up future decision- making processes at Labatt USA. "If Femsa wins the injunction, it gains more leverage. If it loses, it still has leverage," wrote Carlos Laboy, an analyst with Bear Stearns (BSC, news), in a research note Friday.

Analysts say Femsa could opt to seek a new partner, tackle the U.S. beer market alone, or sell its beer business entirely and focus on its sizeable soft drink operations. Femsa is the world's No. 2 bottler of Coca-Cola (KO, news).

Interbrew and AmBev, meanwhile, are eager to create a behemoth that would be the globe's leading brewer by volume, surpassing Anheuser-Bush Cos (BUD, news).

Interbrew's lawyers on Wednesday told Judge Batts it would be "helpful" if there's a ruling on Femsa's injunction request by May 19, when Interbrew's board of directors is scheduled to meet next. But they acknowledged afterwards that it's out of their hands for the time being. "My expectation is that Judge Batts will render a ruling prior to May 19. But that's an expectation, it's not a promise, and it's certainly not a promise by Judge Batts," said David Tulchin, a defense lawyer with Sullivan & Cromwell.


30 April, 2004