The U.S. Department of Justice (DOJ) has dismissed concerns raised over Craft Brew Alliance’s (CBA) sale of Kona Brewing’s Hawaii operations to private equity firm PV Brewing, according to a March 17 response brief to public comments filed by the state attorney general and Maui Brewing Company founder and CEO Garrett Marrero.
The response paves the way for a federal court to enter the DOJ’s final judgment in Anheuser-Busch InBev’s acquisition of CBA, including the Kona business beyond Hawaii. A-B finally agreed to acquire the remaining shares in CBA in November 2019 for about $220 million.
The DOJ determined after “careful consideration” that the required divestiture of CBA’s Kona Hawaii business to to PV Brewing Partners — the investment firm made up of former A-B president Dave Peacock and Overland Park, Kansas-headquartered VantEdge Partners — provides “an effective and appropriate remedy for the antitrust violation alleged in the complaint and is therefore in the public interest.”
The DOJ filed an antitrust complaint to enjoin the proposed transaction because “it would substantially lessen competition” in Hawaii between Kona and A-B brands Michelob Ultra, Stella Artois, Bud Light and Budweiser, potentially leading to pricing concerns and reduced innovation.
According to the DOJ, Hawaii was the only state in which the acquisition would have threatened competition, giving A-B 41% of the beer market in the state.
In June 2020, CBA announced the sale of Kona’s Hawaii business to PV Brewing in an effort to appease regulators and finally consummate the marriage of the Portland, Oregon-headquartered craft brewery roll up to the world’s largest beer manufacturer. That deal closed in October 2020.
The DOJ said the divestiture proposed within the Final Judgment “remedies the harm to competition alleged in the complaint by requiring a divestiture that will establish an independent, economically viable competitor in the state.” The agency’s review determined that PV Brewing “is a well-financed company, backed by private equity, that is incentivized to compete aggressively in the Hawaii beer market.”
As such, PV Brewing would be able to compete immediately by assuming similar arrangements CBA had with A-B, including supply contracts, a distribution agreement and transition services.
During a 60-day public comment period, two comments were filed in opposition to the sale, one by Marrero and one by Hawaii Attorney General Clare Elizabeth Connors, who the DOJ noted declined to use her office’s authority to challenge the transaction under antitrust laws.
The DOJ said concerns raised by both were in regards to PV Brewing continuing “to significantly rely on ABI such that it will not compete independently with, nor constrain, ABI.” Those included:
- A-B retaining the right to the Kona brand outside of Hawaii;
- PV Brewing entering a distribution agreement with A-B’s wholly-owned wholesaler in the state, similar to CBA prior to the proposed deal;
- PV Brewing entering agreements to brew and package Kona beer, similar to CBA’s prior agreements;
- PV Brewing entering temporary transition services agreement with A-B, for finance and accounting, human resources, supply and procurement, and consulting services, among others;
- The selection of PV Brewing as the buyer “was unfair.”
The DOJ said there was “no basis” for concern over A-B’s ownership of the Kona brand outside of Hawaii and the point of the divestiture was to restore competition in Hawaii. The divestiture achieved that by granting PV Brewing “the assets, rights and personnel it needs to be a robust competitor in Hawaii, the only state in which the transaction would have otherwise harmed competition.”
“Regardless of ABI’s rights to the Kona brand in other geographies more than 2,000 miles away, the acquirer will be the sole owner of the rights to sell Kona-branded products in Hawaii — the state where the competitive harm is alleged to occur,” the DOJ said. “As such, the acquirer will be fully empowered and incentivized to compete and grow its sales in Hawaii, thereby preserving the competition that would otherwise be lost as a result of the transaction.”
The DOJ also noted that PV Brewing’s arrangement with A-B’s wholly owned distributor is “optional and terminable.” In fact, PV Brewing can terminate the distribution deal without cause one year after the contract goes into effect, allowing it the opportunity to choose another wholesaler in Hawaii.
“The threat of termination without cause will incentivize ABI’s wholly-owned distributor to promote and sell the Kona-branded products to the acquirer’s satisfaction in order to retain the popular Kona brand in its portfolio,” the DOJ said, adding that the carryover of Kona’s existing leadership team will give the company the experience needed to compete in the market.
As for the non-exclusive supply contract between the two companies, the DOJ said the deal expires after a maximum of five years to ensure full independence from A-B and “cannot be extended, amended, or otherwise modified without the approval of the United States.”
Concerns over the construction of Kona’s 30,000 sq. ft., 100,000-barrel production brewery is incentivized to ensure its completion and will ensure PV Brewing is able to produce canned and kegged beer. If the facility doesn’t meet those needs, the DOJ said PV Brewing can contract brew its offerings.
The DOJ also tackled Maui’s contention that the process in which PV Brewing was selected as the acquirer was “unfairly administered” and completed at a price “below fair market value” and was chosen due to its “clear ties to ABI.”
The sale of Kona’s operations in Hawaii to PV Brewing was valued at $16 million.
In a letter to the DOJ, Marrero said his company was intrigued at the possibility of acquiring the Kona brand in Hawaii “to combine the two brands into a truly authentic Hawai’i organization leveraging the strengths of both.” Marrero wrote that he was part of several offers for the company that were not accepted including “a significant premium over the PV Brewing offer.”
“I was clear that this Indication of Interest (IOI) could be swiftly converted to Letter of Intent (LOI) and provide the basis for a Sale Agreement and close quickly to meet the needs of all parties,” he wrote. “Prior to this direct offer, I was a consultant on an offer that was nearly a 3X premium above what was ultimately paid. I would think that the shareholders of CBA would have wanted their company to accept a qualified buyer and the highest bid.”
Although Maui characterized PV’s offer for Kona as “quite low,” the DOJ said “it is common for divestiture assets to be sold at below-market prices, because the ‘divesting firm is being forced to dispose of assets within a limited period. Potential purchasers know this.’”
The agency added that its goal of a divestiture is to “ensure that the purchaser possesses both the means and the incentive to maintain the level of pre-merger competition in the market of concern” and not “to pick winners and losers” or to “protect or favor particular competitors.”
The DOJ added that Maui’s assertion that PV Brewing has “‘clear ties to ABI,’ ignores the fact that the divestiture will not only preserve the competition likely to be lost by the transaction, but will enhance Kona Hawaii’s independence from ABI,” which will no longer hold an ownership stake in the business.
The DOJ called PV Brewing “an appropriate acquirer” that is “capable, willing, and incentivized to compete effectively and will preserve competition in the state of Hawaii.”
A-B, Patagonia Settle Trademark Infringement Lawsuit
Anheuser-Busch and Patagonia have settled a trademark infringement lawsuit first filed by the outdoor clothing maker in 2019 over the world’s largest beer manufacturer’s use of “Patagonia Brewing Co. ” an A-B spokesperson confirmed.
Filed in California federal court, Patagonia alleged that A-B was attempting to co-opt its 40-year-old apparel company’s brand and reputation, including making promises to plant a tree for every case of Patagonia beer sold as well as developing a “strikingly similar” logo that features a mountain silhouette.
Patagonia was attempting to block A-B from selling its “Patagonia” branded beer and is seeking damages.
Terms of the settlement were not disclosed.