Dramatic doings last couple of weeks on journey to biggest beer deal of all time. Just after the deal for ABI-SABMiller finally passed one of its most important hurdles, US Dept of Justice approval, the whole deal suddenly looked less certain briefly. Even so, odds of it going thru remain high, say analysts/others. Then too DOJ consent decree with ABI/SABMiller included significant conditions on how AB treats its independent US distribs. Adding to drama, DOJ decision dropped smack in the middle of an AB wholesaler panel meeting. There, a disappointed AB had to explain meaning of consent decree to panel distribs, many of whom had worked hard on and embraced the now DEAD VAIP, for example.

On top of it, over in UK, activist shareholders agitated for and already got a higher price. ABI raised its price just slightly and this is "final" offer. SABMiller closed ranks while it considers revised offer. It told employees to stop working on integrating operations or talking to ABI. "The convergence planning workstreams are being paused," wrote ceo Alan Clark, "pending the board's considerations of the revised offer. This means that there should be no contact with AB InBev with immediate effect." This sent mkts into a tizzy and stocks of affected cos under pressure. But shareholders signaled approval for revised deal and stocks recovered. At presstime, Chinese authorities also conditionally approved deal. That was last remaining regulatory hurdle. Stay tuned.  

ABI North American sales and marketing expenses up $140 mil, 24% in 2d qtr and $215 mil, 20% in 1st half (vast majority of North America biz in US) as marketing investments "were weighted toward the first half," said ABI. And yet AB still managed to grow its US EBITDA $66 mil, 4.8% in 2d qtr and 3.6% in 1st half. Why? Cost of goods sold pressure eased. Down about $150 mil, 5% in North America in 1st half. Then too, rev per bbl up 1.8% in US in Q2, driven primarily by our revenue management initiatives and positive brand mix," said ABI. So no price war in US beer. While there was "a lot of talk about discounting," Brito said on conference call, "our discount $$ were the same," just "applied differently". ABI sees "very encouraging" performance in US, as AB "really stepped up our sales execution, making our sales dollars work even harder for us." Brito also said "wholesalers are delivering great results" and that collaboration with wholesaler panel on 3-yr plan "especially helpful."

But AB's biggest gainer of course is Michelob Ultra. It grew over 20% for the 2d qtr in a row. If pace sustains, Ultra will grow over 1 mil bbls in 2016, offsetting vast majority, perhaps even all, of Bud/Bud Light declines. Each of Bud and Bud Light down low single digits, said ABI. Bud Light down 40 basis points of share, while Bud down 15 basis points, estimated ABI. Meanwhile, Michelob Ultra gained 55 basis points in Q2. So Ultra and Bud/Bud Light kinda canceling each other out from a share/volume perspective. Asked about "mystifying" Mich Ultra pricing in line with Bud/Bud Light on key holiday promos, Brito said: "Let's not confuse pricing policy, which has been very consistent" with "some events to drive experimentation, penetration, beer on lips." Strong as Ultra growth is, "penetration is still very low," added Brito. But that lower Ultra pricing just for 3-4 days for holiday period. Typically, Ultra priced at index of 1.25 to Bud Light and "no change there." On Bud Light, there's "still a lot of work to do," Brito acknowledged. Tho share trend "stable," it's still "negative." Yet consumers "responding positively" to "theme and visual intent." Purchase intent and various brand attributes are up, and while improvement "not yet reflected in share trend," AB remains "very committed" to investing behind #1 brand. Meanwhile, Stella and Goose Island each up double digits. Estrella Jalisco "initial results very positive," said Brito, "especially in California."  

Combo of significantly stronger Q2 this yr and Q3 last yr meant AB made significant volume progress vs its biggest competitor over last 12 mos thru Jun 2016. Indeed, AB posted trend that's 2+ pts better than MC's for 12 mos, albeit still down. For each of last 3 calendar yrs, AB and MC trends have been within 0.5-1 pt of each other. Then too, MC lost 1 mil bbls more than AB and almost 4X the volume that AB lost over this 12-mo period. Meanwhile, Constellation picked up over 2 mil bbls as AB and MC combined shed about 1.9 mil bbls. That's more than 1 mil less than top 2 collectively lost on avg last 3 yrs.

With strong import gain offsetting flat-to-down domestic shipments and cider dropoff, US shipments up 0.5 to 1% for Q2, 6 mos and 12 mos, we estimate. Twelve mo trend of +0.8% suggests per capita consumption rate holding, notes NBWA economist Lester Jones. AB reported shipments to wholesalers up slightly (+0.5%) in Q2. So its 6-mo and 12-mo dropoffs in 0.3-0.4% range, cutting AB's calendar-yr 2015 decline by 3/4. AB depletions down 0.9% in Q2, -0.7% for 6 mos. In sharp contrast, MC took a tuff 4% shipments hit in Q2. It had shipped ahead of depletions in Q1, then paid the price. MC's 12-mo dropoff shipments pace, at -2.7%. That's right where it's been each of last 6 yrs. On depletions basis, AB about a point better than MC for 12 mos, down about 1% vs MC dropoff of 2%. AB's 6-mo depletions trend about a point better as well. Gotta note view could change going forward, especially as AB has much tuffer Q3 shipments comp (+1.6%) than MC (-4.6%).

Constellation really cranked it up in Q2, especially with incremental Ballast Point volume. Up 850K bbls, 18.5%, we estimate. Gained 1.4 mil bbls for 6 mos, much more than combined AB/MC loss. (Constellation reported 15% volume trend for 6 mos thru May 2016, including almost 170K bbls of Ballast Point; big Jun boosted calendar qtr.) And as noted, Constellation scored 2 mil+ bbl gain for 12 mos, passing 8 share of US-only biz. (AB and MC numbers in table include exports.) Much less volume movement below these top 3 players. HUSA turned from up slightly to down slightly, we estimate. Now even for 12 mos. Pabst starting to cycle big NYFRB numbers from last yr. Up just 1% in Q2, tho still up 6% for 12 mos and revs far stronger than that. Boston down 4% in Q2, 5% for 6 mos and now negative for 12 mos. It's guiding flat to down 4% for the yr now and this yr Boston will include extra 53d week in its reports. Yuengling off slightly for 6 mos too, about 3%. Trends in south (including Miss intro) stronger than north and Yuengling, like others, facing big challenges on-premise. Our data suggests craft gain slowed to mid-high single digits. Brewers Assn, which includes Yuengling but excludes others (like fast-growers Founders, Lagunitas and Ballast Point), estimates craft biz up 8% for 6 mos. That number's getting trickier and trickier to determine, but slowdown is real, especially for established flagships and several of biggest players, which are flat or down (i.e. Boston, Sierra, New Belgium, CBA, and Gambrinus). See more on current state of craft below.  

Combo of significantly stronger Q2 this yr and Q3 last yr meant AB made significant volume progress vs its biggest competitor over last 12 mos thru Jun 2016. Indeed, AB posted trend that's 2+ pts better than MC's for 12 mos, albeit still down. For each of last 3 calendar yrs, AB and MC trends have been within 0.5-1 pt of each other. Then too, MC lost 1 mil bbls more than AB and almost 4X the volume that AB lost over this 12-mo period. Meanwhile, Constellation picked up over 2 mil bbls as AB and MC combined shed about 1.9 mil bbls. That's more than 1 mil less than top 2 collectively lost on avg last 3 yrs.

With strong import gain offsetting flat-to-down domestic shipments and cider dropoff, US shipments up 0.5 to 1% for Q2, 6 mos and 12 mos, we estimate. Twelve mo trend of +0.8% suggests per capita consumption rate holding, notes NBWA economist Lester Jones. AB reported shipments to wholesalers up slightly (+0.5%) in Q2. So its 6-mo and 12-mo dropoffs in 0.3-0.4% range, cutting AB's calendar-yr 2015 decline by 3/4. AB depletions down 0.9% in Q2, -0.7% for 6 mos. In sharp contrast, MC took a tuff 4% shipments hit in Q2. It had shipped ahead of depletions in Q1, then paid the price. MC's 12-mo dropoff shipments pace, at -2.7%. That's right where it's been each of last 6 yrs. On depletions basis, AB about a point better than MC for 12 mos, down about 1% vs MC dropoff of 2%. AB's 6-mo depletions trend about a point better as well. Gotta note view could change going forward, especially as AB has much tuffer Q3 shipments comp (+1.6%) than MC (-4.6%).

Constellation really cranked it up in Q2, especially with incremental Ballast Point volume. Up 850K bbls, 18.5%, we estimate. Gained 1.4 mil bbls for 6 mos, much more than combined AB/MC loss. (Constellation reported 15% volume trend for 6 mos thru May 2016, including almost 170K bbls of Ballast Point; big Jun boosted calendar qtr.) And as noted, Constellation scored 2 mil+ bbl gain for 12 mos, passing 8 share of US-only biz. (AB and MC numbers in table include exports.) 

A funny thing happened at this yr's Natl Conference of State Liquor Admins, annual oppy for state regulators to mingle with industry attys and discuss mutual concerns. While past programs have been both informative and provocative, this yr a coupla key points emerged, but not really addressed. Indeed, conspicuously absent: in-depth discussions of bizzes' hottest regulatory topics. Like what? Like pay to play in Mass and Wash and whether other states are looking at this issue, TTB's comments on cat mgmt, consignment sale offers in compromise, efforts to ban AB branches and more. Veteran alc bev atty Richard Blau talked about several of these issues in passing. But no one from TTB even on program and most panels rudimentary at best. That included consolidation panel, where official from Justice Dept could not even say anything about ABI-SAB. Distrib consolidation, despite monster wine & spirits deals, got cursory attention. Richard did raise a few provocative questions, like how never-contemplated, "unprecedented consolidation" in middle tier challenges system. He noted serious charges just levied against liquor distrib for shipping across state lines (otherwise unexplored). Another morsel: how craft beer's success strains sales tactics (pay to play in Mass and Wash and consignment sales cases). How many states bar producers and distribs from giving things of value to retailers but are "silent when retailers solicit" inducements, Richard also asked. Now that's an interesting topic, given shift of power to retailers in recent yrs.

Another missed oppy: panel ostensibly focused on "adapting the three tier system and tied house rules to the future." But it barely scratched surface of rich and timely topic. Indeed, that missed oppy encouraged a very frustrated veteran atty John Hinman to note from audience that while 3-tier system "logistically necessary," what's happened in state after state is that "exceptions have swallowed up the original purposes" and now "we're micromanaging exceptions to the point where they are absurd." Richard and John's points should have provided plenty of fodder for great discussions. But they didn't. 

At presstime, US Dept of Justice consent decree with ABI and Molson Coors reportedly agreed upon and imminent. DoJ is last significant global regulatory hurdle ABI-SABMiller deal faces. DoJ must pass muster on related transaction for Molson Coors to buy SAB's 58% stake in MillerCoors too. (China hasn't ruled either, but since Chinese govt will buy SAB stake in Snow, that's perhaps a formality.) Consent decree will impose some significant conditions on ABI, INSIGHTS hears. For example, word is AB will not be allowed to buy more US craft brewers, (as first reported in our Craft Brew News). If so, don't know what that will mean for fate of AB's last acquisition, Devil's Backbone. DB deal not approved by DoJ, is on hold, INSIGHTS hears. It hasn't closed 3 mos after announcement. Then too, AB branch ownership could be capped, sources say. Not much in way of conditions on Molson Coors, INSIGHTS understands.

In a way, it's surprising that US is last regulatory body to rule. Why? Because there are no structural antitrust issues here. Neither #1 nor #2 player will gain nor lose share in US as result of this transaction. However, there are so many ancillary issues, especially related to ABI, that DoJ took its time. In addition to traditional antitrust analysis, DoJ had to listen to and sift through all the many concerns about AB past behavior and potential future conduct, as expressed by distribs, smaller brewers, and even regulators, including a Kentucky contingent, for example. A veritable parade of people reportedly wanted to be deposed by DoJ. That was their private bite at the apple. They get a public bite at the apple too, in form of a comment period, reportedly 60 days, after consent decree filed.  

Not very many notable beer distrib transactions popped in 1st half but 2d half started with a bang. Frank Liquor, parent co of Frank Beer Dist and La Crosse Bev, will buy Beer Capitol, the state's largest beer distrib at around 9.5 mil cases. When that transaction completed around Oct 1, Frank will sell 17 mil cases of beer, over 25% of beer volume in state, and have almost 750 employees. Frank sez it will be one of top 20 US beer distribs. It will also be MC's largest distrib in its highest share state (40 share) selling 11 mil cases of MC brands. That's over 40% of MC biz in state (27 mil cases last yr). On top of it, Frank reportedly will sell about 1.3 mil cases of Constellation and about 1 mil of New Glarus too. Frank is a 4th generation family biz in Madison that sells beer, wine and spirits across big swath of geography in state. Beer Capitol owner Aldo Madrigrano is current MC distrib council chairman, former NBWA chair, one of the more outgoing and visible beer distribs. Not often that a sitting council chair sells.

MC had tuff time in Wisc in recent yrs. Lost 7 share and 15% of its biz in last 5 yrs. That hadda hurt, even if craft/imports way up. Recall, Beer Capitol sold off part of its territory last yr, near 1 mil cases, to neighbor Ott Schweitzer. Recurrent rumblings that Beer Capitol for sale in recent yrs. At times, there was reportedly friction between Aldo and biz partner Ron Fowler, who is also part-owner of San Diego Padres. With this deal, Ron has now sold off all his beer bizzes, tho he retains stake in Columbia after selling Mesa to Meritage last yr. Frank Beer Dist reportedly came in with high offer.

So distrib deals slow going so far in 2016. INSIGHTS reported just 2 new deals for entire distrib bizzes this yr; normally write about 20 or so in a yr. But lotsa action behind the scenes and many deals in works. Perhaps the Beer Capitol deal signals beginning of a stepped-up pace. In contrast, still a bunch of interesting craft deals in 1st half, including Victory, Cigar City and Devil's Backbone and several other smaller transactions. However, Devil's Backbone sale to AB Apr 12 was last deal for craft brewer over 50,000 bbls. And that deal still hasn't closed. AB may not be allowed to buy more craft brewers (see below) and MC hasn't done anything this yr, perhaps because of impending deal for Molson Coors to buy rest of MC. Plus Constellation and Heineken are digesting their purchases from last yr. Meanwhile, craft trends slowed down. All that just might lead to some interesting discussions re valuation. Duvel Moortgat USA ceo Simon Thorpe has plainly called these valuations "ridiculous." Yet plenty more craft deals in works too.  

Some fascinating details/charges in Pabst response to MC's attempt to halt Pabst lawsuit and compel mediation. Pabst willing to mediate, but argues MC "misreading relevant contract provisions" to compel it and hasn't made case for stay. Rather, MC acting in bad faith and trying to "stall, keep Pabst in the dark and avoid regulatory scrutiny of its efforts to control the pricing of affordable beer in the United States." Pabst seeks order to deny MC attempt to compel mediation. Also wants court to force MC to "respond in good faith on an expedited basis" to provide details that Pabst needs to analyze MC "Sufficient Capacity" determination that it can't supply Pabst products after 2020.

Pabst needs that vital info, it insists, even if mediation ordered. After "a year of talking," Pabst sez, MC "still refuses to provide the information Pabst needs to validate MillerCoors' assertions about its capacity and to assess its supposed 'Solutions.'" Recall, key MC "solution" (Pabst calls it a "poison pill" and de facto termination), was proposal MC made in Sep 2015 to increase fixed charge Pabst pays on products MC brews from approx $18/bbl to $45 per bbl. That was more than double what MC allegedly proposed 3 mos earlier, Pabst sez. And MC knew that increase would "wipe out Pabst's business." Why's that? In new declaration from Pabst ceo Eugene Kashper, he said MC had "full knowledge" that Pabst's 2014 EBITDA from brands brewed by MC was "$80 million, and that a $140 million increase would wipe out Pabst's business." (MC made 5.2 mil bbls for Pabst in 2014.) Also new: Eugene claims proposed fixed charge pop "unrelated to the cost of making the capacity available, but rather reflected a per-bbl margin in line with MillerCoors' projected margin on its own volumes in 2020." Only data MC gave to Pabst to support its "sufficient capacity" determination was calculation of volume based on plant capacities which also shows, Eugene sez, MC "will close additional breweries and potentially shutter additional lines at other facilities." On issues of MC's claim that Pabst "hinted" at lo-ball $100-mil offer for Eden plant and failure to offer "reasonable solutions," Pabst repeats need for info to "assess" MC's demand for "a ridiculous 146% increase in the Fixed Charge per barrel [and] its unreasonable $750 million counteroffer to sell the Eden facility."

In declaration, Eugene also repeats that $27/bbl fee hike, and even MC-proposed smaller increase of $22/bbl, "not even close to commercially viable." He claims too Pabst has no other options. Any "alternative brewing arrangement" would take yrs, any "move-in ready" option "unlikely" and MC knew this all along. Replacement brewery would take "at least 5 years to develop," Eugene sez, and developing multiple facilities needed to serve natl mkt would take longer. "No one has built a 'greenfield' facility with capacity of 2,000,000 barrels or more...for over 30 years." And regulatory environment tuffer now. What's more, "not possible for Pabst to acquire existing facilities in order to create its own national footprint." Smaller breweries cannot produce Pabst "at reasonable rates" and don't have packaging configurations it needs. Other than MC, only City Brewing and NAB have done this level of contract brewing, and their facilities "not geographically suited to service Pabst as economically or as efficiently as" MC under current contract.

Pabst Wins vs Winner in Md; Gets Good Omen in Oh Some positive recent results for Pabst in distrib litigation. In Md, judge tossed lawsuit by distrib FP Winner vs Pabst that charged illegal termination after Eugene Kashper's purchase. Judge cleared termination under Md law that allows successor beer manufacturer to move brands. Winner not only lost brands but judge also rejected Winner's bid to get fair mkt value for 'em since it failed to follow process to negotiate with distribs that got brands. Those brands worth at least $9 mil, sources say. In Oh, Pabst got great sign from US Appeals Ct which ruled in very similar case involving NAB and some of same distribs battlin' Pabst over termination under similar statute for successor brewers. Appeals Ct ruled buyer of NAB was successor manufacturer that could move brands without cause. Judge even reduced amounts lower ct had deemed as "diminished value" of those distribs as result of losing brands.  

Constellation Brands Beer Division put up another stunning set of numbers in qtr thru May (released Jun 30): revs up 19%, oper income up 22% and organic depletions up 10%. But to get full sense of how far Constellation currently running ahead-of-the-pack, got to keep looking at running 12-mo totals. Constellation shipments up 1.86 mil bbls, 12.4% last 12 mos, including gains from Ballast Point acquisition. That's more than total US beer shipments gained; up 1.5 mil bbls, 0.7% for 12 mos thru May 16. Ballast Point up 60% in Constellation's 1st qtr, ceo Rob Sands said on conference call. Modelo Especial depletions up about 20% and Pacifico up 17% as well. No Corona trend given, and Constellation acknowledged that recall slowed it down briefly, but "we have no concerns whatsoever" about current health of Mexican portfolio, including Corona "period," Rob said on call.

Constellation revs grew more than $500 mil last 12 mos to $3.8 bil. And beer division operating income soared $270 mil, 25% to $1.336 bil. Recall, Constellation beer revs were $2.3 bil and its profits $435 mil 5 yrs ago. So revs up by $1.5 bil, over 2/3 and operating income more than tripled since then, passing MillerCoors. Volume up 50% in 5 yrs too. Other metrics also look good on a running 12-mo basis. Rev per bbl up 3.1% to $225.47. That's almost identical to Boston Beer in 2015 ($225.55). And Constellation's operating income per bbl is best-in-class. Up to $79.16 per bbl. That's $5.75 operating income per case. More than AB, by a wide margin now. What's more, Constellation's oper income per bbl increased by 11.5% for the last 12 mos.

Constellation continues to be far and away the industry's growth leader. Volume up 13.7% and $$ up 16.6% in Nielsen all-outlet data thru Jul 2. CBBD gained 0.8 share of volume and 1.1 share of $$ YTD. Growth led by Modelo Especial, volume +25% and $$ +28% YTD. Modelo Especial gained 0.6 share of $$; Corona gained 0.3. Corona volume +6.6% in scan, Corona Light +3.4%. Looks like Constellation will place increased emphasis on Negra Modelo: "Negra Modelo will be renamed Modelo Negra," appearing together with Modelo Especial "in a new 'Casa Modelo' ad later this year," wrote Stifel's Mark Swartzberg. Packaging will become more similar to Modelo Especial. Looks like Constellation will be somewhat cautious about fall pricing (see above), guiding to 1-2% rev per bbl increase.  

Total US beer shipments up 1%+ in available data thru May, far better than on-premise and off-premise trends thru Jun suggest. True track for 2016 still murky. Domestic and import shipments for May didn't change yr-to-date picture much. And holiday timing continues to skew off-premise trends. Here's what we know: Domestic taxpaid shipments off slightly in May, -41K bbls, 0.3%, estimates Beer Inst economist Michael Uhrich. So yr-to-date domestic trend up just 64K bbls, 0.1%. But imports still rockin' thanks to Mexican momentum; import shipments +306K bbls, 10.5% in May; jumped 1 mil+ bbls, 7.8% for 5 mos. Put 'em together and 5-mo US shipments +1.1 mil bbls, 1.3%, a bit softer if you include cider dropoff. That ain't bad. But one caution. New "purchasers' index" prepared by NBWA economist Lester Jones based on surveys of distribs show notable dropoff in "beer orders" in May-Jun vs same period last yr. That suggests an inventory build in this period.

At retail, Nielsen all outlet + convenience data shows volume up 0.5% yr-to-date thru Jul 2. Recall, that trend flat thru May 28 going into Memorial Day, which fell later this yr. Volume got big lift, then sagged for 4 wks thru Jul 2. (Same period last yr went thru Jul 4.) So now, it's Jul 4 timing throwin' off short-term numbers, as happened with Memorial Day, Easter, Leap Day and Super Bowl. Never before have timing issues skewed trends so much. Comin' up next: Jul has 2 less distrib selling days, which bodes ill for this month. On-premise remains weak. Beer volume -5.2% thru Jun 30, sez GuestMetrics. Even if taproom biz not tracked by GM still gainin' ground, on-premise still tuff.