Weiss valued InBev as his most important client. The company was also now working with J.P. Morgan, but Doug Braunstein, J.P. Morgan’s head of investment banking, was there more to pull together InBev’s financing package than to offer strategic advice. Braunstein did happen to have a connection to Anheuser-Busch board member Sandy Warner, however, thanks to Warner’s former role as chairman of J.P. Morgan Chase, and his position as a bit of an insider appeared to rankle Weiss at times. “There clearly was growing friction between the two of them,” said one person close to InBev. “There was a point in the process where Antonio didn’t even want to talk to Doug, and basically said to Steve Golub [his Lazard colleague], ‘You know, look, you deal with Braunstein. I’m not going to deal with him.’ ”
It was clear that Weiss was the banker Brito and his fellow Brazilians trusted most. And with so much on the line—not just InBev’s money but also the reputations of everyone involved—a strategic misstep could prove disastrous. Wall Street’s deal-making machinery tends to move in just one direction—forward—and as companies and their advisors get caught up in that momentum, they can lose the ability to retrace their steps or to walk away from a deal. If Anheuser-Busch struck up a deal to buy Modelo, it wasn’t clear that Weiss could still advise InBev in good conscience to stick it out and press onward with the takeover. The deal would be much more difficult to close, the companies would be harder to successfully combine, and the debt required to finance the transaction would bury InBev for years.
Something had to be done to keep the pressure on Anheuser-Busch and force it to focus on InBev’s offer, not on Modelo. The InBev team wasn’t sure how serious the two companies’ talks had gotten. To further muddy the waters, questions were starting to surface over whether Modelo had a contractual right, as Anheuser’s partner, to block InBev’s takeover attempt. InBev’s lawyers didn’t think the claim was valid, but all of the legal running-around had thrown a handful of sand in the gears.
There was one matter on which InBev was confident, however, and that’s what it decided to use as a tool to regain the market’s attention. Some of Anheuser’s shareholders were bound to revolt if it tried to buy Modelo rather than taking the $65 per share offer already on the table. To ignite that group of investors, and perhaps compel them to lobby against Modelo before talks progressed any further, Brito made yet another courtesy call to August IV on June 15 and then sent out another carefully worded press release.
InBev, which had the “greatest respect for Grupo Modelo and its management,” it stated, had read reports suggesting that Anheuser may have approached Modelo about a deal. In light of those reports, InBev wanted Anheuser to understand that its offer was for Anheuser’s current assets and business only, not for its business combined with some or all of Modelo. In other words, InBev was threatening consequences if Anheuser-Busch tried to pull a fast one and ink a deal with Modelo. Its intent wasn’t to convince Anheuser to stop the Modelo talks, which InBev knew was unlikely, but to get Anheuser’s shareholders to rally against them. They were staring at a quick and easy pile of cash for their stock. Why take the risk on a deal with the Mexicans?
Crafting that letter, and pretty much everything else that involved Modelo, was a tortuous process. InBev had “relationships everywhere” in the beer industry, as one advisor put it. It felt the opportunity to rile up Anheuser’s shareholders, however, was worth the effort.
The warning was successful in seizing back the market’s attention for a day or two, but it didn’t illuminate anything new or novel for Anheuser-Busch or its stockholders. If Anheuser was going to buy the other half of Modelo, which it had repeatedly opted against in the past, it already knew it had only one shot do it right. Winning shareholders’ trust was going to be a steep challenge. And that was only after assuming The Fourth could convince his own board that buying Modelo was their best option.
Chapter 10
Angry Bedfellows
They didn’t like each other—that was clear. They held the Anheuser-Busch people pretty much in disdain. They felt they were much better operators.
—Person close to Modelo
Thankfully, Anheuser-Busch had been keeping the idea of buying the rest of Modelo on ice for decades. The Fourth and his deputies understood the concept intimately, since it had been considered countless times over the years and then stuck back on the shelf in each instance. Part of the reason for the company’s paralysis was that the five Mexican families that controlled Modelo had never been willing to sell. Anheuser, however, had never put a compelling offer on the table. Now, The Fourth was eager to convince Modelo that it was time to set the companies’ fractured history aside and get serious.
Anheuser’s board was already well aware of the Modelo option. During a meeting two weeks earlier, when they had first convened to address the rumors of InBev’s bid, they had discussed whether a deal to merge with Modelo could keep InBev at bay.
So in an attempt to salvage both the company’s independence and his reputation, August IV told Tom Santel, the head of Anheuser’s international business, to pick up the phone as soon as the ink dried on InBev’s offer and call Carlos Fernández González, The Fourth’s counterpart at the Mexican brewer.
Fernández, Modelo’s 41-year-old chairman and CEO, had been expecting the call and had done some prep work in advance. On June 10, the day before InBev’s offer came through, Fernández had met with Robert Kindler, a top banker from Morgan Stanley whom Fernández had summoned to his family office on the picturesque Paseo de la Reforma in Mexico City. Kindler caught a 1 A.M. Mexicana Airlines flight that morning out of New York’s John F. Kennedy airport in order to be there on time, a tough pill to swallow even for a road warrior who had spent countless hours traveling as an investment banker and, before that, a corporate attorney. To rub an extra bit of gravel in his bleary eyes, there was no driver waiting to pick him up when he landed at the crack of dawn. He had to hitch a ride to his hotel with a few bankers from UBS who also happened to be arriving in the country’s smoggy capital on business.
Fernández wanted to prepare that day for what Modelo felt was inevitable: a bid by InBev for its partner and majority owner, Anheuser-Busch. Once InBev made an offer and the fireworks started, Modelo wanted to ensure that it could stay relevant and maintain some negotiating leverage rather than getting trampled.
“We knew it was coming,” said one person close to Modelo. “I mean, everyone in the world knew that InBev was making a bid. There was no secret to it—months before that, not just then.”
Kindler and his team at Morgan Stanley, which included bankers both in New York and on the ground in Mexico, had agreed to advise Modelo several weeks earlier after David Mercado, a partner at Cravath, Swaine & Moore, the white shoe firm where Kindler had once practiced law, called to see whether Morgan Stanley had any conflicts that would prevent it from taking the assignment. By hiring Kindler for advice, Modelo had aimed straight for the top—he was one of Wall Street’s highest profile and best-connected strategic minds. The Queens-bred Kindler wasn’t your typical Ivy League banker, though. He had an aversion to neckties and preferred to brag about his stand-up comedian brother Andy rather than talking business.
Kindler’s team hadn’t been given much of a head start, but it didn’t take long to grasp Modelo’s strategic options. The Mexicans had hashed through the scenarios for a deal with Anheuser-Busch numerous times, and they had their priorities clear. By the time Santel called Fernández, Modelo had primed its pump and was prepared to hear what he had to say.
Anheuser-Busch’s relationship with Modelo stretched back to March of 1993, when Anheuser paid $477 million for a 17.7 percent stake in the company. At the time, the deal pegged Modelo’s equity value at $2.65 billion.
Modelo had already ballooned by then into Mexico’s biggest brewer, and the venture represented an effort by Anheuser, which controlled 44 percent of the U.S. beer market, to find better ways to grow as opportunities in the United States became tougher to
come by. The deal was celebrated north of the border as an insightful way to boost Anheuser-Busch’s exposure to a rapidly expanding new market. And while the companies’ pact had holes in it that came back to haunt both parties over the years, the investment proved to be one of Anheuser’s smartest strategic plays. It secured the right to boost its stake in Modelo to just more than half of the company when the deal was first signed, and while it took a few years and at least one threat of arbitration, that’s what Anheuser eventually did.
“That was a great acquisition—a $1.6 billion investment for 50 percent of Modelo, later worth something like $13 billion,” said Jack Purnell, who orchestrated the deal as head of Anheuser-Busch’s international business at the time. “That’s the reason I’m still thought of well around the company.” Don Antonino Fernández, the Mexican patriarch who had been CEO of Modelo at the time of the deal, emerged looking decidedly less victorious, and the perception that Modelo had allowed itself to get hoodwinked only worsened as the years passed.
Modelo had faced several threats in the early 1990s that made it amenable to the deal. The North American Free Trade Agreement (NAFTA) was undergoing final revisions in Washington, and many Mexican companies were concerned about how they would compete against U.S. products that might flow into their market if both countries slashed import taxes. Modelo was also expanding and building new breweries, and its aversion to debt made it eager to find cash to fund those efforts. Mexican beverage maker Fomento Económico Mexicano SA, or FEMSA, furthermore, had already sold a 7.9 percent stake to Miller. If Modelo’s biggest rival was going to tie up with the second-biggest brewer in the United States, the best way for Modelo to top it was to ally with No. 1 Anheuser-Busch.
Anheuser-Busch had plenty of reasons to need Modelo, too. Despite their differences, both companies shared a particular history. They had swelled into the 500-pound gorillas in their respective markets by expanding and improving their own businesses, not by acquiring others. It took scrappiness and fortitude to do that successfully, and both companies had struck upon winning recipes.
More importantly, however, Anheuser had buried itself in a pile of efforts to sell Budweiser abroad that added up to relatively little. It needed a better way to snag some foreign growth for itself, and Mexico’s thirsty crowds were pushing beer consumption upward by 6.5 percent a year. The Third’s archrival, Miller, was moving much more aggressively to take advantage of this type of global expansion.
When The Third finally pulled the trigger and bought into Modelo, it marked a refreshing change for Anheuser staffers who had grown tired of chasing their tails on deals that never happened. The tie-up took several messy years to come together. Negotiations were plagued by stops and starts. Agreements were reached in principle, and then disputes arose over agreements. August III and Jack Purnell jetted down for meetings with representatives for the families that controlled Modelo in cities ranging from Guadalajara to Cabo San Lucas. And The Third turned repeatedly to his beloved dialectics to determine whether the investment was worthwhile, pitting teams of executives against each other to debate the matter. Purnell and his staffers conducted three separate month-long reviews on the Modelo deal over a span of two years.
“There were problems over control initially,” Purnell said, which was hardly a surprise given The Third’s historic tendencies. “August was very much a hands-on manager, not a big delegator. He wanted control, but later on, after taking a trip to Mexico, got comfortable not having control.” August’s willingness to let Modelo take the driver’s seat was atypical, since his inability to cede control had torpedoed most of the other deals Anheuser-Busch had considered. Part of his decision stemmed from the political situation during that era in Mexico. The companies felt Modelo might be able to deal more effectively with Mexican President Carlos Salinas and other top politicians, who were heavily enmeshed in the business sector, if it remained under Mexican control.
The debate over who would pull Modelo’s puppet strings, once resolved, gave rise to another sticking point in the talks. If the Mexicans were going to stay in charge of their own business, August III thought it only seemed fair that they should get less money for the stake they were selling. Disagreements on pricing stalled the talks for a long time, but “eventually,” Purnell said, “they came around to our price.” Modelo’s willingness to take a lower offer finally got the deal done. The fact that Anheuser had secured sweet financial terms for itself wasn’t lost on Modelo. Angst about the partnership within Modelo’s controlling families intensified during the first few years of the tie-up as Anheuser increased its ownership at prices that looked cheaper each time Modelo’s performance beat expectations.
Using options that were set to expire at the end of 1997, Anheuser bought up chunks of Modelo until it owned just more than half the company—but not without a battle. In late 1996, three years into the agreement, Anheuser announced that it planned to pay $550 million to more than double its stake to 37 percent. A dispute over the purchase price stalled the deal, however, and Anheuser warned its investors that if the two parties couldn’t reach an agreement, the issue might tumble into arbitration. Three months later, Anheuser finally made its purchase—but at a cost of $605 million, a 10 percent increase over its initial plan. It then paid another $550 million the following month to buy its remaining 13.25 percent stake, bringing its total ownership to 50.2 percent. Through all three transactions, the amount of cash Anheuser sunk into Modelo totaled $1.63 billion.
From a financial standpoint, the investment proved lucrative and critically important for Anheuser-Busch. Without the profits it reaped from Modelo, it would have endured even harsher rebukes from Wall Street analysts and investors as its own business in the United States slowed. A variety of terms in the agreement stacked up in favor of Modelo, though, and provided some reassurance to its controlling families even after Anheuser-Busch seized majority ownership.
The most valuable cards in Modelo’s hand involved control. The original deal with Anheuser gave Modelo sole decision-making capability, not only over how its operations were run but also over the amount of money it paid out in cash dividends each year. Those dividends went straight to Modelo’s controlling families and to the company’s other shareholders, including Anheuser-Busch.
“There were theoretical hooks in the agreement, but the reality is that Modelo had the biggest hook,” said one person close to Modelo. “It was entirely under Modelo’s control how much cash stayed at Modelo or went out to the shareholders. And from Anheuser’s perspective, the only thing they really cared about was the dividend because they had no control. Historically, there were a lot of disputes about that. Anheuser really couldn’t control what Modelo was doing.”
A different problem drove Anheuser’s beer wholesalers to the edge, however. U.S. distribution rights weren’t included in the 1993 agreement—which meant that although Anheuser-Busch had invested heavily in the company, someone else imported Modelo’s beers. Anheuser tried to win the rights to import Corona, but in 1996, Modelo tied itself for another 10 years to its original distribution partners in a move that looked suspiciously like an effort to swat Anheuser away. Modelo brushed Anheuser back yet again when those agreements expired, leaving Anheuser’s distributors still competing against Modelo’s beers in the United States rather than selling them. “That was a real point of contention with Mr. Busch in the 2000 decade,” said a former top executive at Anheuser-Busch. “How come we don’t have rights to Modelo when it was a growing brand—how can we not have rights for all of our wholesalers?”
The Third, despite his intense powers of coercion, never found a way to shoehorn the Mexicans into submission.
“These guys were expecting to buy the company in the first years of our partnership, and they were doing everything they could to upset us,” said one person close to Modelo. That’s one of the reasons the families that owned Modelo set up a controlling trust to manage their interests—to make it clear that they had no plans to sell. The T
hird and his team’s rude and persistent entreaties angered Modelo’s Mexican patriarchs.
“They were not going to sell their souls to us after the way we treated them,” a top Anheuser executive said. “He would just get livid, he would threaten, he would cajole, he would do everything he could to try to make them do it,” the executive said. “That’s not the way you negotiate a deal.”
Money and control weren’t the only thing that drove Anheuser-Busch and Modelo to the wrestling mats. The more time the two companies’ executives and family members spent with each other over the years, the less it seemed they could stomach the personal interaction. Some executives in St. Louis felt Modelo wasn’t trustworthy—that they didn’t play by the same rules of business conduct Anheuser did. Modelo insiders, meanwhile, saw the Busches, and August III in particular, as patronizing and rude.
“August III they despised,” said Harry Schuhmacher. “He was just so arrogant.”
One particular tale that reared its head during the InBev takeover battle was legendary at both companies. In the early 1990s, when the two rivals were still negotiating their original deal, a group of Anheuser-Busch executives flew down with their spouses to Cabo San Lucas, a vacation spot on Mexico’s Pacific Coast, for a weekend of deep-sea sport fishing. The group convened at the docks one morning with Modelo’s top executives and their wives, packed what they needed into a couple of fishing boats, and motored off with their hired crews in search of marlin.
August III’s boat hooked a good-sized fish not long after setting out, and Valentín Díez, a senior vice president of Modelo at the time, took the chair and began fighting to reel in the fish. More than an hour later, August III glanced over at Valentín, who was covered in sweat and still laboring behind the reel, and suggested that someone else should relieve him for a while. Then The Third’s cell phone rang, and he turned away to answer the call, rejoining the group moments later to announce that he had to return to the United States for an urgent matter. Something clearly ranked higher on his list of priorities than the opportunity to bond out at sea with his potential Mexican business partners.
Dethroning the King Page 22