The new company sparked an uproar from its suppliers when it announced it would take 120 days to pay its bills rather than 30 days, affording itself time to use that money for other purposes. Local electronics giant Emerson, whose executives had always had close ties with the Busches, launched a boycott in protest and stopped buying Anheuser-Busch beer for its headquarters, conference center, private jets, and even, ironically, its suite at Busch Stadium. One vendor of beechwood chips lost out when the company consolidated its vendor roster and closed up shop entirely.
St. Louis had fought Milwaukee for decades for the right to call itself the “beer capital” of America, but thanks to the Brazilians, that critical claim to fame vanished overnight. Residents who had always compared St. Louis to larger Chicago as an important Midwestern nexus began to worry that without an independent Anheuser-Busch, it could tumble down the roster toward the likes of Des Moines, Iowa.
It didn’t take long for St. Louis’s citizens to make their distaste for the new regime apparent. Anheuser-Busch’s market share in the once loyal town, which had hovered at nearly 70 percent, fell in 2009 as sales at Schlafly, an independent local brewery, shot 38 percent higher. Schlafly’s founder said nearly a thousand resumes from former Anheuser-Busch employees piled into his mailbox in 2009.
Brito’s effort to tackle the most conspicuous example of Anheuser’s excess, however—its fleet of corporate jets—moved much more sluggishly than many analysts had expected. Coach-class airfares quickly became the rule, and the company attested that it planned to eventually sell every plane in its fleet. Yet, more than a year after the deal closed in late 2008, it still owned a few planes and employed several pilots. When a local newspaper latched onto the apparent hypocrisy, InBev said it was “not in a rush to sell them” into a rough resale market, and a spokeswoman refused to address the exact number of planes that were either being sold or still being used. InBev still used the Anheuser jets “when it is a cost-effective option,” she said.
InBev put several large assets on the auction block to help pay off its massive debt to the banks that financed the merger. It sold Anheuser’s 27 percent stake in China’s Tsingtao, sold a few beverage can and lid making plants to Ball Corporation, and sold its own South Korean beer business for $1.8 billion to private equity firm Kohlberg Kravis Roberts & Co.
More critically for American consumers, InBev put the 10 heavily trafficked theme parks in Anheuser’s Busch Entertainment unit—including its three SeaWorld locations—up for grabs soon after the merger closed. Just less than a year later, it announced it would sell the enterprise to private equity firm The Blackstone Group for up to $2.7 billion.
“It killed me to see they had sold those theme parks,” said one former ad executive. “The Busches were such outdoorsmen, and they were so committed to preserving the environment and working with and helping animals.” The Brazilians timed their sale well, however. Two months after the sale closed, an orca attacked and killed a female trainer at SeaWorld in Orlando, sparking a renewed round of protests over shows that feature such animals in captivity.
Brito’s decision to cut Anheuser’s top marketers loose also generated plenty of scorn. InBev needed to cut $1.5 billion in costs, and it was clear that Anheuser’s massive advertising budget would come under scrutiny—particularly in such a rough economy. Brito had never hid the fact that he favored shooting far fewer commercials each year and employing fewer ad agencies than Anheuser-Busch used. Experts argued that chopping at Anheuser’s ad budget and sticking gum in the gears of its creative process could permanently snuff out the fire that made Budweiser an American icon.
“What other brewer has gotten to 50 percent of the market?” said Charlie Claggett. “What’s that worth, and what did they spend to get there? To me, that’s how you do it. You can’t do creative in a research laboratory. You can test stuff until you’re blue in the face, and you end up with work that P&G does.” Some of InBev’s success in selling Budweiser will forever be based on the global political climate, which puts it outside of InBev’s control—a fact that its data crunchers may find difficult to stomach.
“The beer is such an American flag, it’s such an icon, that your sales into each country really depend on what people think of America,” said Claggett, who worked on the Budweiser account in England for a while. “When America’s stock goes up, sales of Budweiser go up. To talk about Budweiser as an international brand, like Heineken or Beck’s, is a little bit naïve because none of those brands are as iconic as the red, white and blue Budweiser label.”
In one regard, InBev actually decided to lay out some cash. It signed a 10-year lease on 31,500 square feet of office space on Park Avenue in New York, pouring fuel on the speculation that Brito would eventually abandon St. Louis and shift Anheuser-Busch InBev’s North American headquarters to the East where he was now based. Anheuser’s St. Louis employees took particular offense to the news and ramped up their anti-InBev rhetoric, calling Brito “Carlos Burrito” and rechristening the company’s famous One Busch Place address as “One Brito Place.”
InBev’s executives and their advisors, unsurprisingly, made out quite well. Brito moved with his family to a tony Connecticut suburb north of Manhattan, joining a wealth of other top staffers who eagerly relocated from sleepy Leuven to New York to set up shop in the company’s new Park Avenue digs. A bar to serve their expanded roster of beers was quickly installed at the office. A better lifestyle in the Big Apple paled as a motivational tool compared to the pay deal Brito and InBev’s other top executives cut in the wake of the merger. The company’s top 40 executives set themselves up to reap stock options worth nearly $1 billion, if not considerably more, if they were able to shrink the company’s debt levels back to normal levels by 2013. Brito was poised to pull in more than $200 million in options alone if the value of the company’s shares doubled. The company quickly shot well ahead of schedule on its debt-slashing campaign, an indication that those sums wouldn’t remain hypothetical for long.
The deal marked the pinnacle of success for ambitious InBev board members Jorge Paulo Lemann, Marcel Herrmann Telles, and Carlos Alberto da Veiga Sicupira. Out of their estimated $50 million investment in Brazil’s Brahma in 1989, they cultivated a 25 percent stake in Anheuser-Busch InBev worth roughly $9 billion by mid-2010, making relatively few cash injections along the way. A little less than two years after the deal closed, in September of 2010, an investment firm backed by Lemann, Telles and Sicupira called 3G Capital—which also happened to employ Marc Mezvinsky, the man who married former first daughter Chelsea Clinton that July—announced plans to buy Burger King, another iconic American company, for $3.3 billion. 3G said it would open more restaurants in Asia and, to no one’s surprise, Latin America to try to boost Burger King’s sagging performance. Antonio Weiss’s work as InBev’s most trusted advisor pushed his star straight to the top at Lazard. He was named as the investment bank’s global head of mergers and acquisitions in March of 2009 and, months later, when Lazard chief Bruce Wasserstein unexpectedly died, as global head of investment banking. Weiss relocated from Paris back to New York, taking up residence with his family along the western edge of Central Park; in 2009, he was identified as the banker who worked on more deals that year than anyone else in the world. Frank Aquila and George Sampas brought home huge fees for Sullivan & Cromwell, as did Doug Braunstein for J.P. Morgan. In June of 2010, Braunstein was named chief financial officer of the bank, which was paid handily both for financing InBev’s deal and for providing advice to the company.
Compared to the long months of late hours and last-minute travel most takeover battles require, the level of involvement on both sides was relatively painless. The work didn’t end when the deal was signed in July, however. Both companies had a gargantuan amount of effort to put forth before the merger actually closed, and the global financial markets had started crashing down around them. As the pillars of credit that supported Wall Street grew increasingly fragile in the fall, stress lev
els at both companies ratcheted higher. “I bet we had as many board meetings on ‘Is this deal going to close?’ as we had on “Are we going to do the deal?’ ” said one Anheuser advisor.
Pat Stokes flew to New York at one point and questioned Tim Ingrassia over lunch about the worsening liquidity crisis. Stokes had a good view on how hard the Midwest was getting hit by the housing crisis and credit crunch, and he was worried that the odds of the deal’s collapse were rising.
“On a scale of one to ten, Tim, where are you?” Stokes asked.
Ingrassia said there was an eight-out-of-ten chance that the deal would still close as negotiated—decent odds in his view, given the carnage he was seeing on the Street. Stokes looked as though he had been punched in the gut. To him, a 20 percent chance of failure sounded mortifyingly high.
No one could have predicted that just months after the Anheuser sale was inked, the global financial markets would collapse and one of the 10 European banks that agreed to finance the deal—Dutch bank Fortis—would flat-out fail. InBev had deliberately chosen a pool of banks that looked strong enough to withstand the market’s battering. Anheuser’s share price hovered roughly 7 percent below the agreement’s $70 price that September, however, as a slew of banks imploded, a reflection of how wary investors had become over the deal’s chances of success. In mid- and late September, right after the collapse of Lehman Brothers and the rapid-fire sale of Merrill Lynch to Bank of America, one analyst warned that “should the credit environment deteriorate further, the proposed $52 billion takeover of A-B could fall apart. At this point, we think the deal is likely to go through,” she said, “but with new uncertainties unfolding almost every day, we think it is important to be cautious.”
“The banks must have been nervous,” said an Anheuser advisor. “I guarantee InBev was scared to death.” And it had reason to be. The airtight contract InBev had signed to get the deal done was threatening to come into play. If some of the banks that had agreed to cover the deal’s nearly $55 billion in financing failed, and others tried to use that as an excuse to get out of their commitments, InBev would have to fund the acquisition on its own.
“There was no remedy. They had to close,” an Anheuser insider said. “One way of closing was to give us their company. This thing could have really been a mess.”
“When that contract was signed, we joked that one way or another, either they’re going to own us or we’re going to own them,” said another. “And for the next five months to closing, there were plenty of points in time in that crisis when you really wondered which way it would go.”
If InBev had made its offer just a month later, or if Anheuser-Busch had waited a month or two more to admit defeat, key players on both sides say the deal would never have happened. The takeover’s perfect timing was a fluke that had little to do with planning or strategy.
“One of the things that enabled all of this was that the credit markets were willing to shower them with loans,” said Sandy Warner. “It wouldn’t have been possible to do this a month or two later.”
InBev and its banks did close the deal, however, slightly ahead of schedule, on November 18. The stock of the old Anheuser-Busch, known for its “BUD” ticker symbol, stopped trading, and shareholders were paid $70 for each share of stock they owned. Modelo kept InBev tied up in arbitration for more than a year and a half over whether it could block the deal, but in July of 2010, a panel ruled that the takeover did not violate Modelo’s original agreement with Anheuser-Busch. The ruling confirmed that InBev could keep its half-stake in Modelo and sparked new talk over whether the rest of the Mexican brewer would finally be sold.
Despite Anheuser’s missteps and its arrogance over the years, Bob Lachky said ruefully that he couldn’t help but feel like a victim of America’s cutthroat and, later, fractured business climate. “What’s really amazing is how merger mania and the weakness of the American financial system really did us in,” he said. “Yes, we could have done all of those other things . . . but we were doing so well in our own little world.”
As more time passed following the deal’s closure, however, Anheuser’s newly minted former executives turned thankful that it happened precisely when it did. Had the merger been signed up earlier, they might have sunken their new piles of cash into the stock market just before it tanked. And had Anheuser-Busch come up for grabs later, the chances of convincing InBev or anyone else to pay $70 per share would have been slim.
They were lucky to cash out at all—several other takeovers had already fallen apart by the time the Anheuser-Busch deal occurred, and many more collapsed soon afterward. Nearly a year beforehand, in the late summer of 2007, the buyout of Home Depot’s wholesale supply unit was renegotiated to cut $1.8 billion off the price. That kicked off a slew of other broken or nearly broken takeovers, including the $15.3 billion purchase of chemicals maker Rohm and Haas by Dow Chemical and the failed mega-buyout of Canadian telecommunications giant BCE. All together, a scrap heap of $660 billion worth of deals fell apart in 2008. Thanks to its bulletproof contract, the InBev takeover of Anheuser-Busch was one of the few transactions that survived.
“At the end of the day, this deal looked phenomenal because the whole world fell apart and the Anheuser shareholders got $70 a share,” said an Anheuser insider. “Who knows what that share price would have been if the deal had gone away and the markets collapsed?”
“Could we have maybe gotten a couple more bucks? Maybe we could have. In hindsight, in light of everything that happened in the financial markets and everything else, the premium that was attained—in the biggest all-cash bid in the history of U.S. companies, right at the crash of the financial markets—was a remarkable thing for the shareholders.”
“It makes the board look like heroes for reasons totally outside of anything they ever did. From a shareholder perspective, they can be heralded as heroes for things that they really don’t deserve.”
The debate over whether to ask for more than $70 per share had seemed logical on Wednesday of the takeover battle’s final week. By the time the companies announced their deal that Sunday evening, though, the U.S. government had announced that it would take emergency measures to rescue Fannie Mae and Freddie Mac—two mortgage lenders that owned or backed a combined $5 trillion in home mortgages. Both companies’ share prices had lost nearly half their value the previous week, which had factored into some Anheuser directors’ decisions to take InBev’s offer while they had the chance in case the market spiraled downward.
“The banks were telling us, ‘You guys could get $75, you could get more,’” said Bob Lachky. “We couldn’t have gotten that. We were lucky we got $70. They had one bank fail. We were lucky.”
“These guys would be like, ‘You guys are only in the first inning at $70, you’ve got nine innings to play.’ And I was like, ‘You’re talking about people’s lives here. You guys can just jump in a lake.’ Because in the end, you were wrong. $70 was the perfect place. If you’re going to talk about the cold reality of the takeover price, we were fine. Glad we didn’t listen.”
In commendation for his efforts to broker the “hotly contentious, then widely praised” sale of the company, Sandy Warner was named “2009 Outstanding Director” by the Outstanding Directors Exchange. Ed Whitacre was quoted as saying that the board was “very fortunate” that Warner had rotated into the lead director position by the time of the deal. “Sandy was the perfect guy to be in that role when InBev approached,” he said.
“We got one of the best deals in the history of business when we finally completed the transaction,” said Forese. “It’s just one of those things that happens in industry in general. People get acquired. People move on.”
Epilogue
The way this played out was Shakespearean in nature. I haven’t decided which play.
The dynamic between father and son was just Shakespearean and tragic.
—Advisor to Anheuser-Busch
The wisdom and success of each U.S. presidential ad
ministration tend to be viewed through a lens that grows more and more prismatic as the years pass. Popular decisions that seemed brilliant at the time morph into dead ends down the road, and others that looked ill-advised at the outset prove lucky. The same can be said for the reign of August Busch III.
Perhaps, rather than coldheartedly selling his company out from beneath his son, August III was actually fighting to make sure Anheuser-Busch survived in some way once it was irretrievably backed into a corner. He helped secure a high price for the company as beer sales started flagging and the economy turned south, and then traded off all of its risks and responsibilities to InBev—which couldn’t have closed the deal at a worse time as panic gripped the world’s markets at the end of 2008. Anheuser-Busch InBev’s sales slid 2.2 percent in 2009 and then started to drop off even more significantly. The company’s cost-slashing effort “was already running out of steam in the first quarter of [2010],” said Benj Steinman, publisher of Beer Marketer’s Insights. “North American earnings were down, and the volume declines early this year were like nothing we’ve ever seen.”
Some former executives argue that handing the company to InBev was a necessary end to Anheuser’s story after the string of wins it posted through the 1980s and early 1990s. “The things that made us great when we were growing from 10 percent market share to 48 percent are not the same things that make a company great when it’s going from 48 percent share to 55,” said Jack Purnell. “It’s the difference between the winning ingredients in consolidation and the winning ingredients once the industry has already consolidated.”
He continued, “Fortunately for the company, InBev has some of those skills—skills you need when you are not gaining share at a rapid pace. When you are gaining share, that’s all you need. You can have relatively low pricing, but as long as you’re gaining share rapidly you’re going to be fine. But once you stop gaining share, you’d better have cost-cutting and pricing and focus skills, and these are three skills InBev brings.”
Dethroning the King Page 39