Interbrew will pay Diageo $105 mil for rights to sell Bass in US and take over Jun 30, 2003.   Interbrew will have “operational control” of 7 of top 12 import brands and 24 share of imports in US, it pointed out.  Question is will Bass sell thru Labatt USA or Beck’s North America?Interbrew ceo Hugo Powell told analysts it depends on US Court of Appeals decision in FEMSA lawsuit.  Hugo noted that even if brands can’t be integrated into LUSA, option of a standalone Beck’s/Bass combo would be “attractive” because Interbrew keeps 100% of margin, instead of splitting 70/30 with FEMSA.   Part of agreement with Diageo is to “expressly avoid loading,” in fact will “build inventory down” by next Jun. 

Meanwhile, all is change at Diageo as usual.  Guinness Bass Import Co will change its name and get another new prexy, sr spirits exec Dave Eickholt, the 7th in last 11 yrs.  Meanwhile, John Replogle, who ran GBIC for 1 yr, becomes gen mgr for all of Diageo brands in New Eng.   More in Beer Marketer’s INSIGHTS.

Litigation ain’t cheap. Maris wants AB to pay $23.3 mil for Maris atty fees, plus $3 mil "costs" (for experts, copying, etc). That’s just for state trial. Maris sez it will file separate request to recover some of its fed antitrust trial fees too since "much discovery" applied to both cases. Look at some atty bills: 1) Bernie Dempsey, Maris atty in fed trial who was off case when state trial started, billed over 7000 hours for state trial at $275 per, for $2 mil. Others at his firm billed additional $4.2 mil. 2) Atty Manny Socias’ fee was $1.1 mil, $165/hr. 3) Willie Gary, billin’ at $750/hour, lookin’ for $1.3 mil, Madison McClellan ($450/hr) wants $929,000. Other Gary associates seek another $2.9 mil and they asked court to triple entire Gary firm bill for "contingency risk" to total $15.4 mil. (That’s about 30% of $50-mil verdict.) Maris’ "trial experts" not bashful either. Economics consultant billed $1.2 mil. Operations guy billed $353,000. Maris argues it deserves the $26.3 mil because it was "prevailing party" on "the core facts" both sides relied on. Impossible to apportion fees among various claims, Maris argues, so Maris "entitled to its attorneys fees for the entire case." Meanwhile, AB argues since judge tossed a bunch of Maris‘ claims, AB entitled to its own atty fees/costs defending those claims. Also wants Maris to pay for "special master" investigation of atty misconduct. AB didn’t specify amount it seeks. Note: 1) atty fee issue may not be resolved until "all appeals exhausted"; 2) if AB has to pay Maris fees, and doesn’t recover any of its own, means bill for this case closin’ on $100 mil, plus its own legal and exec costs. Ouch. AB did get $13 mil from distribs who acquired rights to sell in Maris territory.

Last yr it looked like 21st Amendment "on the wane," but after a series of 2001 direct shipping decisions that affirmed states' rights to regulate alcohol, it’s "very much alive and kickin’" Marc Sorini, a partner at DC law firm McDermott, Will & Emery, told small brewers. "What a difference a year makes!" he emphasized. Another area of law undergoing change in Marc’s view is antitrust. That took "somewhat of a backseat" over last 20 yrs, but could be "creeping back in" with "new relevance," he said. The driver for renewed antitrust scrutiny? You guessed it: consolidation. In a recent merger between large spirits distribs, antitrust concerns reportedly caused "at least 1 major brand" to get cut out of deal, he said. This industry "on cusp of such consolidation," said Marc, that "antitrust is going to surface again" as some will think there’s less competition. But he also pointed out that AB had won fed antitrust suit against Maris, and that class action suit by various micros against AB "remains stalled."

Maris jury verdict against AB in state court "not really very much of a precedent," Marc said. Viewing case as "watershed... in general overplays significance." Since it was jury verdict, he said "not surprisingly" the "small, warm and fuzzy" Marises prevailed over "very large corporate defendant" AB. Verdict of $50 mil split the $60 mil Maris wanted and $20 mil AB offered. When jury "split the baby," also "not surprisingly" it "went a little towards the plaintiffs," Marc added. Decision does "reaffirm that AB is not invincible" and that litigation, especially against AB is "horribly expensive." (No kidding! See below.) Verdict is "important," but not a "sea change."

Marc saved his harshest assessment for NY wine and spirits distribs who recently used hackneyed neo-prohibitionist arguments in direct shipping lawsuit. "It’s really unbelievable when you read this stuff and realize it was bankrolled by industry," said Marc. Thinks they "embraced" positions "they don’t really believe" in effort to win case, but this could have "significant implications in future." These "damaging assertions" in NY case could have "one of worst long-term implications on liability" and "bad implications for entire industry," Marc also said. What’s Marc talkin’ about? Battlin’ direct shipments in NY lawsuit, a group of wine & spirits distribs, a retailer assn and state alc bev commn got affidavits from leading neos which claimed, among other things: 1) "Rates of drunk and disorderly behavior, homicides" and car crashes are "higher in areas where there are more alcohol outlets"; 2)Increasing hours and days of sale are "associated with more" crashes, "more domestic violence and more drunkenness"; 3) Excise taxes on alc bevs "affect the rate of fatalities from alcohol-related auto accidents." Not only are these claims bogus, but alc bev industry has been fightin’ ‘em for decades. In another strange twist, same groups claimed that wine, not beer, is "beverage of choice among young drinkers as well as older ones." In US last yr about 6.2 bil gallons of beer sold compared to 577 mil gals of wine.

Add another surprising piece to current beer biz puzzle: volume stayed strong in supers in Sep, even after Sep 11. Since total beer biz sluggish at best, supers clearly taking from other channels. Up 2.7% for 4 weeks and 4% for 13 weeks thru Sep 30. Up 1.5% yr-to-date now. While top 3 brewers each up in supers last 3 mos, each lost share. Grupo Modelo brands growth accelerated to 14% for last 13 weeks. Gained 0.4 share of volume during that period. And Guinness gained 1.1 share in same period, all of that Smirnoff Ice. Smirnoff Ice even more impressive as share of $$. Got 1.9 share for last 13 weeks and #12 brand. The other brand that gained most volume share: #1 brand Bud Light up 0.7 share Jul-Sep. Busch Light and Mike’s Hard Lemonade each gained 0.3 share for 13 weeks. No other brand gained more than 0.2. Biggest share losses last 3 mos: Bud brand down 0.4 share of volume and Nat Light down 0.3.

At same time as volume grew in supers, trading up continued and pricing held. Avg price paid for a case of beer in supers was $15.85, up 65 cents, 4.3% in 4 weeks ended Sep 30, according to IRI. Avg price paid for most big brewers/importers’ brands up nearly as much or more for 4 weeks than yr-to-date. For example, avg price paid for AB brands up 44 cents per case, 3.1% for 4 weeks compared to same period in 2000, almost as much as 48 cents YTD. And Coors prices up 47 cents, 3.1%, slightly more than YTD. Brands of Grupo Modelo up 48 cents, 2%, much more than avg 31-cent increase for 9 mos. A coupla departures: Miller and Guinness Bass Import Co. Miller brands up only 33 cents on avg last 4 weeks, compared to 44 cents YTD and Miller Lite up only avg 25 cents in Sep. Avg price paid for GBIC products down $1.47 for 4 weeks and down more than a buck yr-to-date. That’s because Smirnoff Ice sold at avg $27.59 per case, significantly lower than Guinness or Bass. Then too avg price for Bass down 49 cents, 1.7% last 13 weeks. Avg prices paid for all GBIC products at $28.69 YTD, almost twice what major domestic brands sell for.

Miller’s 3d-qtr number a "marginal improvement" and strategies "are showing early signs they are beginning to work," PM cfo Louis Camilleri told Wall St. Sales-to-retailers down 2.5% in 3d qtr as Miller increased mktg weights and improved distribution (see last issue). Core brands down 0.9%, which Louis called a "significant improvement" over previous qtrs. Miller’s "domestic underlying shipment" trend down 300,000 bbls, 3% to 10.3 mil bbls in 3d qtr. (Underlying means PM not including Molson or discontinued brands in 2000 number that Miller sold last yr.) Total Miller shipments about 5% below what Miller actually sold in 3d qtr last yr. For 9 mos, Miller total shipments about 2 mil bbls, 6% lower than last yr. Miller’s "underlying" oper income down $11 mil, 8% in 3d qtr, which PM attributed to "lower volume" and "higher marketing spending for its core brands." PM also took a $19 mil "contract brewing" charge as it absorbed much of Pabst’s closing costs for its Lehigh Valley brewery. Including that hit, Miller oper income down to $404 mil for 9 mos. That’s 18% below last yr’s reported number of $491 mil, which included about $7 mil of income on Molson brands. Miller about 3.1% of PM’s total oper income. Total Miller revs at $3.3 bil for 9 mos. That’s almost $150 mil, 4.3% below last yr, but "underlying" revs down $48 mil, 1.4% for 9 mos.

Despite industry softness, for 2d straight mo a modest upside shipments surprise. Sep domestic brewers’ taxpaid shipments (including malternatives) up 100,000 bbls, 0.7%, estimates Matt Hein of Beer Inst. Follows better-than-expected Aug estimate, which was a slight dropoff. But including tuff Jul drop, taxpaids down 550,000 bbls, 1.2% in 3d qtr. Off 600,000 bbls, 0.4% for 9 mos and down 1.7 mil bbls, 1% for 12 mos. Aug import data not available as INSIGHTS went to press, so tuff to say how 3d-qtr total shipments will shape up. Some top beer execs and Wall St analysts see total biz softening. Miller prexy John Bowlin said recently that 2001 total biz less than Miller expected. AB group veeps Randy Baker and August Busch IV acknowledged (pre-Sep 11) that 2001 total volume not what AB expected, but they forecast 4th-qtr pickup. Mixed Wall St views. Caroline Levy of UBS Warburg recently expressed skepticism that increased number of young drinkers will necessarily fuel "acceleration in industry growth." She suggested "lower consumption rate among young adults," stronger liquor trends, "softer" economy might put damper on beer growth. On the other side, Bill Peccoriello of Morgan Stanley just wrote "on-going impact to on-premise" beer sales after Sep 11 "not as bad as investors fear," and market has "unrealistically negative" view of volume trend. Caroline downgraded AB stock; Bill didn’t. Wild cards going forward: 1) lingering effect, if any, of Sep 11, especially on imports and on-premise; 2) how shipments will fare vs easy comparison with 4th qtr taxpaid shipments last yr, which were down 1.1 mil bbls, 2.7%.

Even industry leaders scratchin’ their heads these days at unexpected softness of beer mkt, several speeches to recent BAA (small brewers assn) meeting showed. If you take out malternatives/coolers etc, domestic beer biz down 2% thru Aug, Miller prexy John Bowlin said. If you include those products-- which Miller figures will be about 5 mil bbls in 2001-- and strong import growth, total US malt bev biz still only up 0.4% thru Aug, added John. So 2001 an "OK" yr for total beer biz, John said. But "we thought we’d have a better year." Industry "got off to a slow start" with "cold wet spring," then "economic slowdown" and now after Sep 11 "our industry took it hard," especially "on-premise." That’s "going to put a damper" on industry results. On top of all that, some young adults "not drinking our product as much," John added. "We’re trying to sort it all out," said John. "How much" of shift "is permanent?" he wondered.

Longtime industry consultant Bob Weinberg also puzzled by industry slowdown. Bob pointed to "extraordinary uncertainties" in beer biz. Called these "scary times," but besides unexpected slowdown, gave no other reason. For 3 yrs now, Bob’s economic model predicted better growth. "Didn’t happen," acknowledged Bob, adding that total "demand somewhat less than I expected." Asked if improved distilled spirits growth affecting beer trends, Bob said "beer declining in share of total servings" recently; while that might be significant, Bob "needs more data." "Only growth" in beer is in high-end (which Bob calls "prestige brands") "pure and simple." Yet big brewers’ "image brands" (what Bob used to call "superpremium" and "niche," mostly Michelob family) lost lotsa share of high-end, Bob showed. Had 47 share of high-end in 1991, while specialty had 5 and imports had 47.5. By 2000, imports had climbed to 60.5 share of a much bigger high end, while big brewers’ "image" brands declined to 22.5 and specialty jumped to 17 share.

Meanwhile some traditional lines between beer and distilled spirits "have blurred" recently, noted Beer Inst prexy Jeff Becker. Gave several examples: products like Smirnoff Ice and upcoming AB/Bacardi venture; distilled spirits cos advertising more on tube "and public doesn’t seem to mind it that much; "liquor cos also stepping up lobbying efforts, want more freedom to do tastings, sponsorships and become more mainstream. But "are they the enemy?" Jeff asked. Pointed to issues that beer and spirits cos can work together on, like reducing drunk driving. When asked if spirits cos blurring line as "wedge to push equivalence," Jeff said only "if we allow it," but "lines will blur regardless."

Maris’ $1-bil defamation suit vs AB should be dismissed "with prejudice," AB argues, because: 1) none of allegedly defamatory statements made by AB execs and attys (about Maris engaging in fraudulent conduct, serving retailers poorly), were made with "actual malice"; 2) "gist" of AB statements is "true" since repackaging of old beer "admitted by dozens of Maris Dist employees"; 3) any statements by AB "absolutely privileged" by court since made in connection with court case; 4) statements "nothing more than legitimate business statements" and AB "has every right to reasonably challenge the performance of its wholesalers"; 5) Maris motion too late; anything said before Aug 31 1999 is "time barred"; 6) since Maris Dist out of biz since Mar 97, "incapable of being injured by defamatory statements and has already been awarded the value of its business." AB also reminded that judge declared mistrial on Maris defamation claims during state trial because Maris attys made "active misrepresentations" to court. By filing new claim "far broader" than claim judge already tossed, with brand new charges, Maris has "flouted" court’s order. Court should dismiss claim, AB concludes, award AB atty fees and costs.

Better late than never. Took over 2 mos, but NBWA?s June 5 NYC press conference that focused on benefits of moderate drinking finally got some play in natl media. Lengthy, mostly positive article ran in WSJ this week and Today show interview followed. Writer pointed out moderate drinking reduces risk of hypertension, coronary artery disease, stroke and dementia, and noted other benefits from NYC presentations by Texas doc Norman Kaplan and Harvard researcher Eric Rimm. (Alcohol Issues INSIGHTS, our sister publication, detailed the press conference in June.) WSJ played up beer vs wine angle, leading with suggestion that beer is "even better for you than red wine" and closing with defense by wine rep. But beer vs wine claim was only marginal part of presentation. Indeed, CNN follow-up story stressed that studies WSJ cited actually indicate "alcohol is alcohol is alcohol," that beer, wine and liquor in moderation all provide benefits.

Meanwhile, evidence continues to roll in to support moderation?s benefits. AP recently reported potentially key story that "will change everything we do about heart disease." Turns out that inflammation may be more important cause of heart attacks than cholesterol problems. And just as moderate drinking improves "good" cholesterol, it?s also one way to lower inflammation. USA Today and others highlighted recent studies which show that moderate wine drinking assists lung function, and reduces risk for cardiovascular disease among the obese. Is publicity about benefits of moderation changing the public?s habits? Together with current article, WSJ asked readers: "have studies about the benefits of beer and wine affected your drinking habits?" Tally of 800 readers at end of day 8/13 showed 36% checked off "they lead me to drink a bit more," and 18% checked "they are a great excuse for drinking a lot more," but fully 46% skeptical. They checked "I never believe those studies." Still, any exposure of mounting evidence that moderate drinking has health benefits is a good thing. And ya gotta love WSJ headline: "Healthy Brew: Studies Show Beer May Be Good For You." ????Next issue in 3 weeks. Best Wishes,

A US Appeals Court hearing showed that messy legal wrangle between FEMSA and Interbrew revolves around what is proper grounds to grant hard-to-get preliminary injunction. That may sound like a technical legal issue, but judges’ decision on whether to uphold injunction granted at district court will have far-reaching consequences. These judges will likely determine whether Interbrew has legal right to go ahead with Beck’s integration or not. (While case could be appealed to US Supreme Court, experts INSIGHTS talked to thought it unlikely that highest court would take case). At hearing, judges tuff on both sides and difficult-to-read; expect decision over next couple of mos. Earlier, Interbrew said it would not integrate Beck’s until early 2003 even if it won. If it loses appeal, and Beck's stands alone, clearly it paid too much for Beck’s since its consultant McKinsey ascribed over $100 mil of Beck’s value to synergies from integrating Beck’s into LUSA, according to court documents. Then too, if Labatt wins, injunction reversed and integration goes forward, FEMSA would likely continue its legal case. In other words, this is not a marriage made in heaven.

In meantime, mountains of court documents provide lotsa insight into Beck’s and LUSA biz, plus how Interbrew planned to integrate them and how it valued Beck’s. While Interbrew paid $1.6 bil for Beck’s and planned to make it a "global flagship" brand, numbers show Beck’s equity struggled in US in recent yrs. In particular 2000 was a rough yr, (yr before Interbrew made deal), when Beck’s brand down 66,000 bbls, 10% to 571,000 bbls and total Beck’s North America dropped 5% even while BNA rolled out Beck’s Light. (2000 total lower than INSIGHTS and others led to believe.) In 2001, flagship brand bounced back some, up 4%, but Beck’s Light off 43%. Total BNA biz up 4,000 bbls, 0.5% to 743,000 bbls in 2001. In court testimony, BNA prexy John Lennon said Beck’s depletions down 4% thru 1^st qtr 2002. Beck’s 5-yr CAGR (compound annual growth rate) 95-2000 was 4% or less than half of import growth rate. Yet going forward Interbrew "conservatively" projected growth of 5-6%, at same rate as it figured import segment will grow. McKinsey originally ascribed fully $600 mil value to Beck’s in US. Then scaled that back to $375-430 mil. Over 1/4 of that value McKinsey anticipated would come from combining cos and reducing headcount by almost 100 people, which it suggested would save about $10 mil per yr. If Beck’s integrated, Labatt USA also planned to reduce number of distribs by 30-40% from 775 combined BNA and LUSA distribs to 470-540, court papers say.

Beck’s North America wasn’t only entity to which consultant McKinsey ascribed high value: it valued LUSA at $1.3 bil, with almost half that value in Mexican brands. That's $317 per bbl!! In 1 document, LUSA actual volume in 2001 given at 4.1 mil bbls (INSIGHTS #s on LUSA total and brands very close). But traditionally grandiose LUSA growth projections not evident for 2002: LUSA only expected to grow 4%, including 6% gain for Tecate and Labatt Blue, 5% drop in Rolling Rock (those 3 brands were about 3/4 of LUSA biz). Projected EBITDA per brand for 2002 also given in another document: Tecate and Labatt Blue each estimated to generate $13 mil EBITDA in 2002, while Rolling Rock only marginally profitable, accounting for only $2 mil EBITDA on about 900,000 bbls. LUSA expected to lose $4 mil on Carlsberg and Lowenbrau in 2002. Total projected EBITDA at $42 mil.