“This is not in the spirit of the deal we have been discussing,” he retorted, frustrated that he was going to have to go back to Modelo’s controlling families to relay the news. One of the main reasons they had agreed to negotiate a deal was because Carlos was going to be in charge.
“If someone is going to run this company, it needs to be someone who has a good track record,” Fernández said, turning toward The Fourth. It was crystal clear, Fernández felt, that he had delivered better as Modelo’s chief than August IV had as CEO of Anheuser-Busch.
Soares and The Fourth did their best to diffuse Carlos’s anger during the short amount of time they spent with him that day, but they weren’t particularly successful. “Carlos had to fly to Texas in his private jet, land, do all this kind of crap . . . it was incredibly insulting,” said one person close to Modelo. “Pissed was not the word, if I can remember.”
“I don’t think Carlos would have bothered flying to Texas to be told it wasn’t going to happen,” said another. “I think he went under the pretense of ‘We’ve got stuff to talk about, my family to your family, big deal, only principals, etcetera. And that was when this message was delivered that ‘You’re not going to be CEO, but maybe we can figure something else out—head of the Americas or something.’ ”
Fernández was livid on the flight home, and spent a good amount of time talking with his lawyer about whether Anheuser-Busch’s decision would be a deal breaker for Modelo’s family owners. It had been less than two weeks since the start of their talks, and the Americans were already retracting one of the deal’s key components. What was next?
Sandy Warner quickly called Fernández to apologize, and he tried to explain the board’s rationale. The cost of the transaction was already so high, Warner said, that having Carlos be CEO of the merged company sent the wrong message to Anheuser-Busch shareholders. They’d be giving up too much. However, he laid out what he hoped would be a sufficient consolation prize: Within less than a year, Warner said, he was certain that Carlos would be appointed CEO. It just couldn’t happen right away.
Warner acknowledged that he spent a good deal of time talking to Fernández about the role he could play at the merged company. “I had discussions with Carlos about how capable I thought he was, and said that working with August IV, the Anheuser team and the Modelo team, he had a real future in this company,” he said. “If he still wanted to work—and that wasn’t a given—but if he still wanted to work, there was a lot of work to do, and he and August would make a great team. He’s a young guy, and a lot of things can happen.”
Tim Ingrassia then called Morgan Stanley’s Kindler to try to douse the fire further. “We can’t be viewed as paying you a premium and having you take us over,” Ingrassia explained. “That just won’t work.” Ingrassia then voiced the same pledge Warner had made to Fernández.
“Look, nothing is committed,” Ingrassia said. “But I would be shocked if a year from now, Carlos is not the CEO of this company. We just can’t commit to him.”
“What credibility do you guys have?” Kindler fired back, unimpressed by the olive branch. “You’ve got to be kidding me!”
Carlos reflected on the uncomfortable entreaties The Third had made to him in St. Louis—his furtive admissions that perhaps Carlos was a better CEO for Anheuser-Busch than his own son. He was now starting to doubt The Third’s true intentions, given how clumsily he and the rest of Anheuser’s board had just backtracked.
Somewhat counterintuitively, however, the Anheuser board’s decision suggested to Kindler for the first time that Anheuser was seriously considering the transaction, not just using it as leverage against InBev. The Mexicans took a small bit of solace in knowing that Anheuser’s board was actually weighing the terms of a deal and sorting through governance issues, not just treating the notion of buying their company as a joke.
Carlos and María were angry and frustrated that Anheuser-Busch had retraced its steps, but after decades of bad blood between the two companies, they weren’t surprised. “Modelo was not looking to be sold,” said one person close to the company. “All of these family members are independently wealthy. It’s like ‘You came to us, we didn’t go to you. We’re very happy down here; we have a great business down here. And now, you basically renege.’” Loose promises that Fernández might take over in a year or two weren’t enough to substitute for Modelo’s loss of certainty up front. It was going to be much harder now to strike up a deal that would meet Don Antonino’s approval.
It quickly became clear that without a guarantee that Carlos would be in charge from Day One, there was no way Modelo’s controlling families would accept so much stock as payment for the deal. They didn’t want their fates and their fortunes tied to Anheuser’s board and August IV. So they decided to flip the terms of the deal and demand a mostly-cash transaction. A cash takeover would be tougher to finance, but if Anheuser wanted it badly enough, it was possible. And it was the only option that gave Modelo’s controlling families enough certainty that they’d be paid appropriately for their stake. Their ties to Anheuser-Busch would be limited once they got their payout, and Carlos, who had reached the end of his rope with the gang from St. Louis, could separate from the company and go his own way.
“We came back, after much debate because our guys were so pissed off, and we said, ‘You know, we’ll still do the deal,’” said a person close to Modelo. “But we’re not going to take anywhere near the amount of stock we were going to take in the first deal. We don’t trust your management team. We were happy to take mostly stock if Carlos was running it. We’re not taking a bunch of stock if The Fourth is running it.” Modelo’s game of hardball was morphing into yet another grudge match between the two rivals.
When Modelo set its new proposal in front of Anheuser-Busch a few days later, it discovered that while Anheuser’s board didn’t want Fernández to be CEO, they also weren’t keen on the idea that he might pack up a briefcase full of cash and head off into the sunset once the deal went through.
“There were a lot of negotiations about what Carlos’s role would be,” said a person close to Modelo. “We went back to them and said, ‘We’ll do this for mostly cash, we’ll take a little bit of stock, and Carlos is gone.’ And that totally freaked them out.”
“No, you don’t understand,” Ingrassia told Kindler. “Look, the board will never approve this unless they know that Carlos is on board.”
After more rounds of back and forth, the companies finally agreed to push forward with a mostly cash deal through which Carlos would become the merged company’s international head. Don Antonino and some of the other families’ members weren’t as eager about the deal in its new form, but the elements they valued the most were still intact.
“Nothing was ever going to happen if we didn’t have the structure where Modelo would stay as a Mexican company, in Mexico City, called Modelo,” said a person involved in the talks. “That was fixed in stone.”
Still, Modelo was wary enough about Anheuser-Busch’s capabilities and motives to shift its backup talks with InBev into high gear. It had become clear that whichever two companies struck up an alliance first were going to leave the third out in the rain to get soaked. It was still possible that a deal between Anheuser and Modelo would be scrapped and InBev would win the war. Don Antonino’s support wasn’t 100 percent guaranteed—nor, for that matter, was an endorsement from Anheuser-Busch’s own board. Modelo wanted to have agreements in place ahead of time that gave it free rein over how it spent its money and distributed its beers worldwide.
So Modelo decided to negotiate hard behind the scenes with InBev as well. The Modelo team sat down several times in late June and early July with key InBev advisors to press their most important points. “At the same time we’re talking to Anheuser-Busch, we of course are talking to InBev, because we had to hedge our bets,” said one person close to Modelo. “We had to use one against the other for negotiating leverage.”
“Proof positive that we we
re virtually sure we were a ‘stalking horse’ is that we were playing both sides,” said one person close to Modelo. “We were having as many meetings with InBev as we were with Anheuser-Busch.”
In exchange for greater freedom, Modelo was offering to set up a more consistent formula for paying out its dividend, which would provide more certainty for InBev than Modelo currently afforded Anheuser-Busch. Modelo knew that a steady stream of dividends would prove useful to InBev as it labored to pay off its debt following an acquisition of Anheuser-Busch’s size.
InBev’s point of view, according to one advisor, was that “Modelo had negotiated a pretty bad deal for themselves in the original transaction, and there was hope that this could be used to say, ‘You can have a better deal in some way,’ and sort of pit them against Anheuser and put them in favor of InBev.” Modelo and InBev started working to draft agreements to this effect in early July, but the two companies reached an impasse. Modelo wanted to make sure that InBev, like Anheuser, would have no ability to take control of the company, and it also wanted the right to sell itself—both its own stake and the stake that would be owned by InBev—to a third party if it so chose.
Modelo’s controlling families weren’t pushing hard to sell, but they wanted the chance to change their minds a few years down the road, and they believed SABMiller was an interested buyer. One person close to Modelo said SAB’s advisors were “all over” Modelo in late June and July trying to gauge the prospects of a deal, though a person on SABMiller’s side contended that it wasn’t considering Modelo seriously at the time.
InBev, however, wasn’t willing to enter into a deal that might let Modelo sell its stake to SABMiller. InBev professed to the Mexicans that it would love to buy their entire company, but simply couldn’t do so while it was also trying to acquire Anheuser-Busch. The sheer size of those two companies combined was too much for InBev to digest all at once. That was the reason Anheuser-Busch was considering it as a defense tactic.
“Their view all along,” said a Modelo source, “was, ‘We’re happy to let you run independently. You’re never going to hear from us. We want you to be on the board of our parent company. All we really want is two things—first, that you give us the cash; and second, that you don’t sell to anyone else.”
On Tuesday, July 1, Anheuser’s board was scheduled to meet for a major update on the Modelo talks. Investors had taken a few days over the weekend to digest the details of Anheuser’s cost-slashing plan and to gossip about August IV’s mistake on the call, and the company was finally enjoying a little bit of the momentum that comes with leading the news cycle rather than reacting to it. It didn’t last long. InBev issued a press release that morning—another disclosure that was uncannily timed to coincide with an Anheuser-Busch board meeting—in which it announced that the financing for its bid was now set in stone.
That didn’t provide an ideal backdrop for the meeting, but Anheuser’s team still had reason to be positive. Carlos Fernández and his crew had come around to the idea that he wouldn’t be CEO, and with Anheuser willing to make more of its payment in cash, the potential for a deal was looking good. August IV and the rest of his team were prepared to crank away over the Fourth of July holiday weekend to get the transaction down on paper as quickly as possible.
All they needed was the board’s blessing to continue, and they got it that day. Goldman, Citigroup, and Anheuser’s own executives all presented their views on Modelo and outlined how the deal might affect InBev’s bid. Goldman was confident that the transaction would preserve Anheuser-Busch’s independence. Anheuser’s executives were racking up their third straight week of late nights with those same prayers in mind, scrambling to get the deal done before InBev made its next move. They all understood they were treading a fine line. If they wanted to keep Anheuser-Busch independent, they needed to engineer a deal that would drive InBev away without actually making its bid impossible. That sort of defense tactic could get the board sued.
The Third, given his historic distaste for acquisitions, was never going to be an easy sell. He had even shown signs of buyers’ remorse over the initial stake he had purchased in Modelo—one of the best things Anheuser-Busch now had going for it. Anheuser’s team, however, now believed they were heading into the holiday weekend with a mandate for inking a transaction. They sensed that The Third and the rest of the board, who made plans to meet on Monday, supported their efforts to mold the deal into finished form.
“August III just likes being in control of things, and plenty has already been written and said about his hesitancy with respect to risks in the world and international,” said one person close to the company. “He’s a tough guy, and he’s quite skilled at killing things. He was, at the margin, always going to be a challenge. But I think we all thought it was achievable, and he was certainly allowing it to move forward. He hadn’t killed it yet, I guess I’d say.”
The Fourth and the rest of his team, however, were dangerously close to becoming pawns in a chess game they didn’t want to play. To sign a deal with Modelo, they had to negotiate hard with the Mexicans. There was a chance, though, that Anheuser’s board was saying one thing and thinking another for strategic reasons—that some directors opposed the deal and merely wanted to use Modelo as a bargaining chip against InBev.
If that was the board’s real motivation, the Modelo talks were nothing but a farce, an act Anheuser’s team had to keep up in order to pressure InBev. They would have to pretend they were dead-set on a deal and push it toward completion even if the board had no intention of approving it.
“They had to offset Brito’s bravado, him saying, ‘I’m not moving beyond here,’ ” said one Anheuser-Busch advisor.
“It’s a bit of a bluff. But we knew that he wasn’t going to call it.”
Chapter 13
A Seller from “Hello”
The Third, I think, had decided that he liked the price, and he let them muddle along with Modelo. But he was never going to do the deal.
—Anheuser-Busch advisor
August IV didn’t end up spending that Fourth of July weekend the way he had expected he would just a month or so earlier. His family’s name had been emblazoned on millions of cases of beer sold that weekend, the holiday on which Americans drink more beer than on any other occasion. Ahead of the previous year’s July Fourth, the Beer Institute—a lobbying organization he chaired—had helpfully pointed out that when Thomas Jefferson and America’s other founding fathers weren’t distracted by their work on the Declaration of Independence, many of them had been brewers with a “vision to establish beer as an economic force for the nation’s future.”
The Fourth’s own vision for the future now looked unnervingly hazy. Rather than celebrating America’s Independence Day the way the Institute had said he should—with barbecues, fireworks, and a cold beer—he spent it scrambling for ways to protect the independence of his birthright.
To make matters worse, he and the rest of Anheuser’s board awoke on the morning of Monday, July 7, to learn that InBev had just lobbed in another grenade as part of its siege. It was pushing ahead with its audacious move to forcefully eject Anheuser’s entire board, and had released an alternate slate of nominees it had finalized over the weekend. If elected, those directors would launch a new review of whether to accept the merger bid—and it was likely they’d vote yes. The board of Anheuser-Busch had unwittingly become part of the story.
InBev’s advisors were proud of themselves for assembling a cast of nominees they felt would intimidate Anheuser-Busch. Their goal was to lure former captains of iconic American companies, but they considered their ability to secure two candidates, in particular, as a major coup.
The big win from a psychological standpoint was Adolphus Busch IV. His public plea the previous week for Anheuser to negotiate with InBev had stunned Anheuser’s team, and InBev had twisted the knife even deeper that morning by placing his name near the top of its list of nominees. Adolphus had offered to help Brito in whatever w
ay he could when he had released his letter to Anheuser’s board, and Brito was glad to take him up on it. His willingness to go to bat for the Brazilians was like “manna from heaven,” said one person close to InBev. “We knew Adolphus was around, but no one thought that Adolphus would do this,” said another. For all of InBev’s contentions that it wanted to play clean and keep things friendly, it was more than willing to use the Busch family’s fractured history against it when the opportunity struck.
“When they put Adolphus up at the top of the page, with all of these other guys who were well known, you start to say, ‘Oh my God, these guys have played the ultimate card putting Adolphus in there, because that is an absolute punch in the gut to Mr. Busch [III],’” said one former Anheuser executive. “No way was he ever going to allow another guy from the family, an estranged family member . . . that was the ultimate low blow.”
Henry “Hank” McKinnell, the former chairman and chief executive of giant drug maker Pfizer, also agreed to join InBev’s roster at the request of Lazard’s Steve Golub, who had advised Pfizer on its $90 billion deal to buy Warner-Lambert in 2000 and on its $60 billion purchase of Pharmacia in 2003. McKinnell was a well respected leader in the drug industry and just the type of high-flying corporate leader InBev was looking for. He had, however, been abruptly replaced ahead of his scheduled departure from Pfizer amid questions over his performance and an uproar over his pay.
As for the rest of InBev’s slate, Ernest Mario had run pharmaceutical giant Glaxo Holdings. John Lilly had been CEO of Pillsbury. Others had been top executives at Nabisco, Guidant, and ArvinMeritor. Some of Anheuser’s board members had professional ties to their proposed replacements—Anheuser’s Vernon Loucks, for example, served as an advisor to one private equity firm alongside Mario—and investors were now debating whether InBev’s slate was a better fit for Anheuser than its own board. The move was aimed at luring Anheuser into merger talks, not at actually ejecting its entire slate of directors. InBev, however, looked prepared to wage that battle if necessary.
Dethroning the King Page 30