Dethroning the King

by Julie MacIntosh

  “The Third was right,” said one of Anheuser-Busch’s advisors. “J.P. Morgan didn’t get picked and then worked on the other side.”

  Randy Baker, the company’s lean, square-jawed, and generally unflappable chief financial officer, was particularly furious about how the situation played out. J.P. Morgan had been Anheuser’s go-to bank for credit for as long as many Anheuser insiders could remember, and just weeks before the firm allied with InBev, its bankers had been out talking to Anheuser-Busch to see how they could be helpful.

  Given the two companies’ longstanding credit relationship, J.P. Morgan was the bank Anheuser-Busch would have naturally turned to for money if it had wanted to buy the other half of Mexican brewer Modelo. The bank essentially abandoned its relationship to accept a more profitable commission advising InBev. Anheuser’s board was livid. Citigroup indicated it was willing to help finance the company when it was hired for strategic advice, which replaced the loss of J.P. Morgan to a degree. J.P. Morgan was the strongest bank out there at the time, and after years of access to its credit, Anheuser-Busch suddenly found the door slammed in its face. With J.P. Morgan’s former chief, Sandy Warner, as a key member of Anheuser-Busch’s board, it made things even more awkward.

  “J.P. had a long historic relationship with Anheuser-Busch and had done a lot of financing for Anheuser-Busch,” said one advisor. “I think Anheuser-Busch thought it was incredibly disloyal that J.P. showed up on the InBev side. That being said, to be fair to J.P., they clearly were not asked to be an advisor. J.P. Morgan was incredibly upset that Anheuser-Busch didn’t want to use them. And when InBev was looking for a balance sheet . . .”

  The Fourth, chastised by his father’s anger but not deterred, started making an effort in 2007 to show that he was receptive to merger ideas that would give Anheuser-Busch a bigger global presence. He had built up a relationship with Paul Walsh, the chief executive of alcohol beverage giant Diageo, on the board of FedEx. Walsh seemed interested in exploring whether Diageo and Anheuser-Busch could strike up some sort of deal, and the two executives held a series of quiet but deliberate conversations that centered on two different potential transactions.

  In one scenario, London-based Diageo would sell Guinness to Anheuser-Busch in exchange for a stake in Anheuser of roughly 20 or 25 percent. Anheuser was lukewarm on the notion of owning Guinness, however, and while that deal was periodically discussed, it never gained significant traction. The two companies also discussed something that would have taken things much further: an all-out merger to meld Anheuser-Busch’s beer empire together with Diageo’s spirits and wine. Diageo owned some of the world’s best-known brands, including Smirnoff vodka, Johnnie Walker whisky, and Captain Morgan rum. In certain aspects, combining those brands with Budweiser, Busch, and Michelob sounded like a brilliant concept.

  Brewers and spirits companies have long struggled to find a magic solution that makes merging their businesses worthwhile. Beer and liquor are made, distributed, and marketed differently, so there aren’t many ways to combine efforts and save costs. Plus, investors had been valuing liquor companies more richly than brewers, which made for a financial disconnect that was tough to overcome. Anheuser-Busch and Diageo couldn’t concoct a recipe that worked.

  The connection between the two companies remained alive enough, however, for Citigroup’s Kalvaria to reach out to Walsh right after InBev made its takeover bid. Kalvaria asked to hear Walsh’s point of view on the offer, listening for a sign that Diageo was interested in being a “white knight” for Anheuser-Busch—someone who could rescue it from InBev. Walsh knew Diageo couldn’t offer nearly the same amount of cost savings as InBev could. He was not about to enter a bidding war he would almost certainly lose.

  “Forget it,” Walsh told Kalvaria. “I’m not going anywhere near this.”

  As they ran over the company’s options in 2007, several top Anheuser-Busch executives continued to favor something even bolder: an all-out merger with global giant SABMiller, which was looking to stay ahead of the pack as the industry continued to consolidate.

  That summer, August IV and David Peacock, his close deputy, met SABMiller’s Graham Mackay for dinner at the Four Seasons restaurant in New York, which is housed on the ground floor of the Mies van der Rohe-designed Seagram Building on Park Avenue in Manhattan. The Four Seasons’ Pool Room, a see-and-be-seen spot for New York’s financial and media glitterati, was hardly a discreet setting for high-stakes merger discussions. The dinner was largely meant to help The Fourth and Mackay get to know each other, not to allow for furtive deal-making chatter.

  The Fourth and Mackay spent the meal talking about their respective businesses, barely brushing over how they might fit together. After the bill was paid and August IV and Peacock headed out, Mackay and Kalvaria met for a drink at the Four Seasons hotel, where Mackay was staying. Dinner had gone smoothly enough to consider whether to push things further along, but there were some big questions that would need to be answered. What would it look like if the two brewing giants were hammered together? Where would the merged company be based? And who would run it? If Mackay remained CEO, August IV could perhaps run the company’s business in the Americas. And despite the spotty history between The Third and Mackay, it might be worth handing August III a role as well. Rather than sticking to SABMiller’s home base in London or moving to Anheuser’s beloved but inaccessible St. Louis, they could split the difference and be based in New York. The concept was hardly even in its infancy, but Mackay and August IV indicated after that meeting that they were willing to pursue talks further, and the two companies spent more time analyzing a potential deal. It became one of the Anheuser-Busch strategy committee’s most commonly talked-about options late that summer.

  The key to the deal was how to handle Miller. The U.S. government’s antitrust authorities would never allow a merger that joined the country’s top two domestic competitors. Still, there seemed to be a simple fix—SABMiller would sell Miller to Molson Coors, the third-largest brewer in the country. It wasn’t guaranteed to work from an antitrust perspective, but the companies’ advisors felt it would pass muster. That was enough to perk up Anheuser’s strategy committee and set its wheels in motion. “There was a flurry of analysis and activity around whether a merger with SABMiller would work or could work, and what it would mean,” said one of the company’s advisors.

  Like most of Anheuser-Busch’s dalliances with rivals, though, the SABMiller deal died on the vine. They were both big, proud companies that wanted to play the role of acquirer rather than target, and neither wanted to pay a premium for the other. The constant disconnect between August III and his son also threw cold water on the effort. The Third let The Fourth’s management team spin its wheels to evaluate the potential transaction, but some executives never felt that the SABMiller option had any real momentum.

  “In effect, I think August IV got pulled back by The Third, saying, ‘Don’t go down this route here,” said one person close to the talks. “You had the whole palace coup going on, where most of the people The Fourth liked got fired—which was kind of also right around the end of those discussions,” said another.

  A strategy committee member agreed, referencing the stalled-out talks with both SABMiller and Diageo. “I don’t think it was ever with a plan to go make a deal, because he could never get it past his father. The bottom line was that nothing could be done without the approval of The Third or the board of directors. It was like, ‘You can talk to whomever you want, but I’m not going to allow it to happen.’ ”

  Meanwhile, SABMiller had also been talking about a merger with InBev, and some InBev board members seemed to favor a deal with SABMiller over one with Anheuser-Busch. SABMiller didn’t fit quite as well with InBev as Anheuser-Busch did, but a deal with the South Africans could be much easier to execute than one with the unwilling Americans. InBev and SABMiller held a brief round of discussions, but the talks snagged on several significant issues. SABMiller was uncomfortable with the strong
controlling position of the families that owned most of InBev and felt its shareholders wouldn’t put up with such a structure. InBev, meanwhile, wanted to pay little or no premium.

  “SAB’s point was ‘You know what, if you want to buy the company, give me a price. But we’re not going to play with this,” said one person who was involved in the talks. The discussions wandered off nowhere, and the idea was shelved.

  By October of 2007, SABMiller had endured enough puttering around. Five years after buying Miller to get a U.S. foothold, it announced a groundbreaking deal to merge those operations in the United States into a joint venture with Molson Coors that would be called “MillerCoors.” The deal joined America’s second- and third-largest brewers to create a much stronger competitor to Anheuser-Busch, and was especially painful because Anheuser had scrapped talks with SABMiller only months earlier. Now, SABMiller was pounding down a second stake right in Anheuser’s backyard.

  Citigroup’s Kalvaria quickly called Graham Mackay to see whether Anheuser could tempt him into abandoning the venture or integrating Anheuser into it. “Why did you do this instead of trying to push it further with us?” Kalvaria asked, before pointing out that SABMiller could have it both ways. Anheuser and SAB could still merge and then sell Miller to Molson Coors, just as they had discussed months ago. It might even make things smoother.

  Mackay thanked Kalvaria for his interest but brushed the idea aside. The certainty of the Molson Coors deal was too valuable to sacrifice for the chance to play yet another waiting game with Anheuser-Busch.

  After the MillerCoors venture was announced, Wall Street’s legion of analysts and investors started handicapping which brewing giant would be next to make a major move, and many focused their sights on Anheuser-Busch. August IV had loosened the guidelines that limited the amount of debt Anheuser could take on, which gave it the financial flexibility it needed to be an active acquirer. By that time, though, it was looking more and more like a juicy target.

  To address concerns about Anheuser-Busch’s flagging superiority, The Fourth’s team ratcheted up its focus on a cost-cutting program they dubbed “Blue Ocean.” The effort to wring out waste first started in the company’s brewing division under Doug Muhleman, a calm-spoken Californian with a fondness for nautical references. The Fourth soon implemented it more broadly, initially targeting cuts of $300 million to $400 million over a span of four years. Anheuser-Busch had always kept its interactions with Wall Street to a minimum during The Third’s tenure, but with his son in charge, the strategy committee started considering whether to give analysts a detailed outline of their cost-cutting plans to prove they were moving in the right direction.

  All of the fuss over saving a few hundred million dollars, however, indicated to some industry watchers that Anheuser-Busch was missing the point completely. The right response to SABMiller’s dramatic move in the United States wasn’t a paltry cost-cutting campaign. Across the Atlantic in Leuven, Belgium, InBev took SABMiller’s move as a call to action.

  In October 2007, not long after MillerCoors was unveiled, August IV met casually in New York with Jorge Paulo Lemann, the billionaire banker, spear fisherman, and former Wimbledon tennis player who had co-created InBev and was one of its most influential board members. Lemann, Telles, and Sicupira had steered themselves straight toward the top of the brewing industry since being rebuffed long ago by The Third.

  Through their giant 2004 deal to merge AmBev with Belgium’s Interbrew, the trio had taken a significant stake in InBev and three seats on the new company’s board. The Brazilians and Belgians agreed to share control, but it wasn’t long before InBev’s Leuven headquarters started to look as though they’d been dropped into Belgium from Sao Paolo. Many of InBev’s most important positions were soon filled by executives from AmBev’s side of the deal.

  The Fourth had forged a connection to Lemann through an important joint venture the two companies had struck just as he was taking Anheuser’s helm the prior year. Their meeting in New York didn’t seem particularly unusual to people on Anheuser’s side, given that relationship.

  The meeting held much more importance to people on InBev’s side. Lemann, after referencing the deal SABMiller had just unveiled, suggested to August IV that day that their companies should consider a merger. The Fourth quickly demurred. He had plans of his own to resurrect Anheuser-Busch, and was eager to get back to St. Louis to focus on his cost-cutting campaign. Lemann’s remark wasn’t enough to formally register on Anheuser’s radar screen. According to a regulatory filing it made a year later, “no acquisition proposals were made by InBev” in 2007 or early 2008. However, it rang alarm bells for some.

  “To the extent you were on DEFCON 3, everything dialed up to DEFCON 4 or 5,” said one person close to Anheuser-Busch. “There was no perception that anything was just innocent and casual. You sort of had the sense that there had been a change, which led to lots more preparation, lots more analysis. You could sort of feel that the odds were higher that something was going to happen than they had been.”

  The Fourth may not have felt Lemann’s comment was anything other than an off-the-cuff remark. It had been quite deliberate, however. His quick dismissal of the notion of a merger suggested to InBev that it might have to consider more forceful ways of luring Anheuser-Busch into a deal. “They always said they wanted to put the two companies together, but just not then,” said a person close to InBev.

  Although August IV brushed Lemann aside that day, he did tell some Anheuser executives privately that a merger with InBev could be a great way for Anheuser-Busch to unlock value. “But I don’t think that anybody on our side ever thought we would lose control of the company—that we would lose control at the board level,” said an A-B executive, who posited that InBev began carving Anheuser-Busch up for eating soon after Lemann and The Fourth sat down.

  “August IV was a babe in the woods at that meeting.”

  Chapter 8

  The Old Gobi Desert Trick

  The basic concept was “Come clean, guys. We’re all grown-ups here. What’s going on?”

  —Anheuser-Busch insider, on The Fourth’s trip to Tampa

  While The Fourth’s encounters with SABMiller and InBev and the meeting he engineered in Cancun naïvely sent up a few flares, his instincts were right. Anheuser-Busch was vulnerable. He actually contributed to the problem just before his official start as CEO, however, when he pushed ahead with his joint venture with InBev despite warnings from his father.

  The companies had first considered a deal to make Anheuser the exclusive U.S. importer of InBev’s European brands back in early 2005, when Pat Stokes was chief executive. They spent roughly half a year working through the terms of an agreement before talks collapsed. They tried again the next year after Carlos Brito, who had been stationed up in Toronto during the first round of negotiations, was named CEO of InBev. This time, Brito dealt directly with August IV, who was just a few months shy of becoming CEO. Negotiations were held and information was exchanged, but yet again, the talks broke apart.

  By late 2006, with The Fourth poised to become CEO, he and his team decided that finally inking the venture would rally distributors and help address the company’s stagnating growth. The Fourth wanted the deal to be the first big initiative he pushed through as he transitioned into the top spot. He and his team ensured that the third round of talks with InBev was a success, and the tie-up was announced right after Thanksgiving.

  The venture yielded plenty of benefits—Anheuser-Busch won the ability to offer U.S. consumers a broader variety of beers, like Stella Artois, Beck’s, and Hoegaarden. The Fourth’s eagerness to get the deal done, however, brought worrisome consequences.

  Many joint venture agreements include a “standstill” clause that prevents partners from buying up shares in each other, attacking each other’s boards of directors, or making other moves that could be viewed as steps toward an unsolicited takeover attempt. The Third had opposed the idea of a deal that did not legally prot
ect Anheuser’s independence, and it would have been perfectly reasonable for Anheuser-Busch to force InBev to agree to a standstill. That never happened, though. By the time the companies’ third round of talks got underway in 2006, demanding a standstill provision to ward against a takeover wasn’t a major concern for The Fourth.

  In his defense, the joint venture was too small in scope to warrant a standstill agreement as a normal course of action. “I’m sure A-B could have raised it,” said one company advisor. “I do think that would have been an interesting thing to bring up. But it also would probably have been outsized, relative to the scope of what that JV was.”

  “If A-B continued along the path they were on and InBev continued on the path they were on, I don’t know if a standstill would have mattered at some point,” the advisor added. “Public pressure (to merge the companies) might have been fairly significant nonetheless. But that said, a standstill is a standstill, and it would certainly have been helpful in a raid defense.”

  Curiously enough, despite all of the other efforts The Third undertook to limit his son’s autonomy, he let The Fourth proceed with the deal rather than breaking out his veto. “His dad thought it was a stupid deal, but he let his son go ahead and do it,” said one person close to Anheuser-Busch. Though it wasn’t evident at the time, The Third’s willingness to acquiesce had significant bearing later on the company’s future and on the success of his son’s reign.