Battle brewing between MillerCoors and Pabst over cost, capacity

Court filings detail deteriorating negotiations between industry giants

Miller Coors LLC (2).JPG

Last updated on July 3rd, 2019 at 07:24 pm

Miller Coors LLC (2).JPG
The MillerCoors brewery in Milwaukee.
MillerCoors says for years it brewed beer at “below-market rates” for Pabst Brewing Co. and engaged in “good faith negotiations” to address capacity limitations in a changing industry, but Pabst continually threatened to sue.

“The present litigation is Pabst’s latest response to MillerCoors,” the company said in a court filing this week.

Pabst and its owner, Blue Ribbon Intermediate Holdings LLC, filed a lawsuit against MillerCoors at the end of March, alleging the company “decided to abandon Pabst on a baseless determination that it will lack sufficient production capacity” to continue brewing Pabst Blue Ribbon and a number of other brands. Pabst argued the decision was an attempt to sabotage the company’s ability to compete while also consolidating its market share.

Pabst claims it will suffer $400 million in damages because of the decision.

“MillerCoors has attempted to work fairly and collaboratively with Pabst regarding the extension of their agreement to no avail,” said Jonathan Stern, MilleCoors spokesman. “It is disappointing that they have chosen to let a court resolve this issue. However, we are highly confident that we have acted properly and in good faith in this matter and we believe the court will agree.”

In a statement responding to MillerCoors’ court filing, Eugene Kashper, Pabst chairman and chief executive officer, said the company’s actions were a breach of the contract and damaged the relationship between the two companies.

“We would prefer to find an amicable solution rather than engage in a protracted legal battle, but MillerCoors’ refusal to consider our numerous settlement proposals leaves us no choice,” Kashper said. “We are proud to be an independent American brewer, and refuse to be bullied by anyone looking to stifle competition through unjust means.”

‘Longstanding relationship’ on the rocks

MillerCoors and its predecessors have been providing Pabst with brewing, packaging and shipping services under a variety of agreements dating back to 1999. The most recent agreement dates back to 2007 and is set to expire in 2020, although it contained options to extend it to 2025 and then again to 2030.

Pabst contends the “longstanding relationship” between the two companies is “integral to Pabst’s ability to compete.” MillerCoors says the agreement is not a legal partnership and, while it produces 45 brands and more than 200 individual SKUs for Pabst, the company is a customer of MillerCoors’.

The agreement allows Pabst to extend the contract for five years, provided MillerCoors has the capacity to handle the production. If MillerCoors doesn’t have the capacity, the companies could work together to find a solution that includes Pabst participating financially. MillerCoors informed Pabst last year that it would not have the capacity to continue brewing its beer and the two companies started negotiations to find a solution.

“MillerCoors admits that after years of brewing Pabst’s products at below-market rates, it proposed a possible solution that contemplated Pabst’s financial participation commensurate with MillerCoors’ level of return on its own brands,” the company wrote in its court filing.

Pabst says MillerCoors initially proposed a $1.75 increase to the per-barrel fixed charge Pabst pays starting in 2021, bringing the total to $20.05 per barrel. Pabst contends that after chief executive Gavin Hattersley took over at MillerCoors in September 2015, the offer changed to a $27 per barrel increase, making the total $45.

“MillerCoors’ proposal would represent an unprecedented and intolerable increase from the current fixed charge,” Pabst says in its lawsuit. “MillerCoors’ proposed price increase far outstripped Pabst’s reasonable commercial expectations and betrays MillerCoors’ true intentions.”

While Pabst contends it received “nearly a year of promises and assurances” that MillerCoors would have the capacity to continue producing for Pabst, MillerCoors said no guarantees were made and it would be “unreasonable for anyone to rely upon such promises.”

The company added it made “several commercially reasonable offers” to Pabst and was met with threats of litigation and a demand by Pabst for a $250 million payout to terminate the agreement.

Eden closure

The discussions about MillerCoors’ capacity are complicated by the company’s decision to close its Eden, North Carolina brewery. Pabst claims the brewery was one of the main locations for production of its beer, but MillerCoors says the brewery was one of seven it used and was not the largest producer.

MillerCoors says the decision to close the Eden brewery is necessary to ensure its long-term sustainability. The company noted “literally thousands of new breweries” have opened since it was formed in 2008. Volumes have dropped by 15 percent during that time and MillerCoors says it needs a re-sized brewing network.

Pabst describes the closure of the Eden plant as a “capacity-reduction bombshell” and says MillerCoors wouldn’t entertain an offer to lease the facility and would only sell it for “an astronomical, non-market price.”

MillerCoors responded that it was willing to sell or lease the facility if it made sense financially, but added that it would not be a solution under the 2007 agreement and would involve a separate transaction.

“Moreover, Pabst’s proposals relating to the Eden facility were commercially unreasonable at best,” the MillerCoors filing says. “Pabst hinted at (but never formally proposed) paying $100 million over an indeterminate number of years for a facility worth many multiples of that amount – and then only subject to a procurement requirement extending through 2030.”

The Pabst lawsuit also says that when the company’s current owner, Blue Ribbon, was contemplating purchasing the company in November 2014, it was assured MillerCoors would have sufficient capacity and would extend the agreement on commercially reasonable terms.

MillerCoors’ response says it would have been “unreasonable” for Blue Ribbon to rely on any promises made then. The company says Blue Ribbon’s owners are “sophisticated dealmakers with significant experience in the beer industry, adding “it is utterly unbelievable and unreasonable” to contend that Blue Ribbon would rely on “verbal representations and ‘assurances.’”

“Indeed, if the extension of the agreement was truly ‘integral to Blue Ribbon’s decision to purchase Pabst’ (as plaintiffs allege elsewhere), it is inconceivable that Blue Ribbon would not have insisted on written documentation of the ‘assurances’ it claims to have received.”

MillerCoors is seeking to have the case sent to mediation, arguing the brewing agreement calls for disputes to be handled that way. The case itself was initially filed under seal, but was unsealed after Pabst did not respond to requests to set a day for a hearing.

MillerCoors’ motion to go to mediation will be considered in August.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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