DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz

by Cristiane Correa

  De Marchi called Telles the following day to say the members were ready to talk about the idea.

  Some months before approaching Antarctica, Brahma had come very close to buying the Colombian brewer Bavaria. The negotiations did not work out, as both parties could not agree on the price. After a long negotiation, Brahma offered the Colombians US$ 1.8 billion for the brewer – US$ 500 million on signing, with the rest coming in the future with the help of the company’s cash generation – but the Bavaria people wanted more: US$ 2.2 billion, and a shorter payment period. Telles initially really wanted to make this transaction, but, after the counter offer, he consulted the partners, and Rodrigues and concluded that the price was too high, as the payment conditions could strangle Brahma’s cash.

  Although frustrating for Telles at that time, the decision turned out to be providential. If he had bought Bavaria, Brahma would not have been in a position to take over Antarctica.

  Once he obtained the green light from the Antarctica board, Telles contacted lawyer Paulo Aragão, a partner in the BMA firm, to help him structure a bid. Aragão is a slow talker with a crystal clear way of reasoning, and a slight schoolmasterly tone. He had grown close to Telles and his partners over the years. In the 1980s, he had helped Sicupira establish the variable remuneration program at Lojas Americanas. He became a partner in GP Investimentos the following decade and had known for some time that the three partners had ambitions to transform Brahma into a company with global reach. During a visit to the US with Sicupira and Thompson in 1994, he arranged a meeting with lawyers from Skadden, Arps, Slate, Meagher & Flom, one of the world’s most respected law firms. Shortly after the meeting began, Sicupira asked the Americans how he could buy Anheuser-Busch. As expected, the American lawyers were taken by surprise.

  “It was as though we had said we wanted to buy St Peter’s Basilica,” Aragão recalled with amusement. The Americans responded politely and then changed the subject.

  Five years after that episode, Sicupira’s apparent madness began to take shape. The Dream Project, as the plan to buy Antarctica was dubbed, would be the first step to turn Brahma into the biggest brewer in the world. To get there, the Brahma controllers would have to overcome a series of obstacles. The first was to convince the Antarctica shareholders to sell the company. Not only would Brahma have to come up with an amount that would accommodate the interests of the two sides, but it would also have to be sensitive to the Antarctica side in terms of how the fully executed deal was presented. It would have to be announced as a “merger” and not a takeover, which it actually was. To this day, no one at Ambev ever refers to it as an acquisition.

  The new controllers would have to prove to the regulatory authorities that the creation of a super brewer would not lead to it having a monopoly. Finally, the employees of the two brewers would have to realize that the war was over. There was such a strong rivalry that Brahma staff were prohibited from consuming Antarctica products, even at home.

  “It was like joining the rival São Paulo and Corinthians football clubs to make a single team,” said Aragão.

  The negotiating process was quick and restricted to a few people. Almost all the meetings took place at the GP Investimentos office. Brahma had four key players: Thompson, the negotiator; Aragão, responsible for the legal basis of the agreement; Miguel, Brahma’s distribution director; and Castro Neves, a talented planning manager. The latter two were chosen to work out the details of the Antarctica operation and evaluate the synergies with Brahma. Brahma’s CEO, Rodrigues, was not involved in the process. Telles preferred him to continue working on the company’s daily operation to keep it on track during the negotiations.

  Castro Neves was 32 at that time and the newest member of the team. He was from Rio and had first heard the name Lemann at age 13, when he was already a highly competitive tennis player. Lemann sponsored a juvenile competition in which the winner would have the opportunity to take part in the Orange Bowl tournament in the US.

  “I didn’t know exactly who he was, but I thought it was great that a guy would support a tournament like that,” he recalled.

  Years later, after graduating in engineering from PUC University in Rio de Janeiro, Castro Neves contacted Lemann to ask for another kind of sponsorship. He had been accepted for the MBA course at the University of Illinois in Chicago, but could not afford the fees. Lemann liked the boy, who became one of the first beneficiaries of the Estudar Foundation with a grant of US$ 20,000. He was then offered a chance to work for Brahma in 1996. At the final interview before being hired, Castro Neves asked Telles about rumors that Brahma could be sold after it formed an association with Miller in 1994.

  “We have zero interest in selling,” Telles said. “We have just bought this company and see it as a super long-term investment… I think a CEO has a time limit in the position. I’ve been here for six years and should stay for another four. After I leave, there will be room for another person and new ideas... Unless we buy Budweiser that is [Anheuser-Busch’s main brand].”

  Castro Neves thought the ambition was a little crazy, but felt he would at least have the opportunity to grow within the company and decided to accept the offer. It was the start of a trajectory that would lead to him becoming the CEO in 2008.

  On July 1, 1999, 45 days after the initial move of the Dream Project, Brahma and Antarctica announced the creation of the American Beverage Company, Ambev. The announcement had been scheduled for July 7, but had to be brought forward as Brahma shares began to rise in unusual trading on the stock market. A journalist called Antarctica on June 28 to check whether the rumors that it was to be sold to its rival Brahma were true. Antarctica’s press office denied the “rumor,” but a basic error by Brito almost put the announcement at risk. Seventy-two hours before issuing a material fact notice to the market, the company should have informed the anti-trust regulator known as the Cade. Brito was responsible for sending the document by fax, but accidentally sent it to the wrong number. When he learned about his mistake, he tried frantically to repair the damage before the fax at the other end released information that was still confidential. He succeeded.

  On the final stretch, lawyers, bankers, Brahma’s main representatives and its public relations agent, Mauro Salles – hired to structure how the deal would be announced – almost never left the war room that had been set up at GP’s head office. Telles and Sicupira coordinated the team closely. Lemann accompanied events by phone from the US. The final arrangement foresaw a share swap between the companies – Lemann, Telles and Sicupira would have 18.77% of the total capital of the new company (and 46.08% of the voting capital) and the Zerrenner Foundation would have 10.44% of the total (and 22.67% of the shares with voting rights). Each of the parties would nominate half of the board of directors of the new brewer. The agreement between the two companies was signed in the GP office in the presence of no less than a dozen people, and without much of a party.

  “We are not very good at celebrating,” said Thompson. “We just made a toast and went off to sleep.” That was how the largest deal ever carried out between two Brazilian companies was concluded.

  All that needed to be done was to announce the transaction. A press conference was called at the Antarctica head office. Two spokesmen, Telles and De Marchi – who had both traveled to Brasília the previous day to inform President Fernando Henrique Cardoso of the deal – spoke with journalists. Telles tried to be as diplomatic as possible and appear of secondary importance to De Marchi in the interview – being in the limelight had never been part of his personality. From then on, Telles and De Marchi would be co-chairmen of the board of directors of the new company. The arrival of Ambev would mean Brazil had entered the great consolidation game that was rapidly appearing abroad. The new company would be the world’s fifth-largest beer producer with some impressive figures to back it up: annual revenues of R$ 10 billion, 17,000 employees, 73% share of the beer and 19% of the soft drinks markets.

  Ambev represented an unlikely co
mbination of two firms that had fought for years. These differences were apparent even in the way the spokesmen were dressed at the press conference. Telles, called by his first name by the journalists, wore jeans and a denim shirt, jacket and casual shoes. De Marchi, more commonly called “Dr. Victório,” wore his usual outfit: suit, formal shirt and tie. Bringing the visual difference together would turn out to be the least of the new company’s problems, compared with what lay ahead when the Brahma and Antarctica employees started work on integrating their operations. The so-called “merger” would bring culture shock, dismissals, pressure for results and all other expected practical problems, but it was clear which side would win.

  The first battle – closing the deal with Antarctica – was won. It was time to get the approval of the consumer defense bodies. Persuading the regulator Cade that having more than 70% market share would not give the new company a monopoly, or have an adverse effect on consumers, was a particularly hard task. Ambev’s main go-between with the government was De Marchi, a reserved economist with a measured tone of voice who was used to dealing with Brasília. De Marchi virtually lived in the federal capital for nine months in the period from the announcement of the transaction to its approval by the government. He was constantly busy with meetings with congressmen and government technicians to explain the details of the deal.

  “The degree of concentration the merger created demanded an enormous effort to show the authorities and the Cade, in particular, the advantages it would bring,” De Marchi said.

  To gather convincing arguments, De Marchi relied on a team of almost 30 people, including well-known lawyers, such as Sérgio Bermudes, Ariosvaldo Mattos Filho and Aragão. Castro Neves, who had been involved in analyzing the synergies between the brewers until the announcement, was now traveling to London, Belgium and the US to talk to well-known specialists in mergers and acquisitions.

  “One of our lawyers said the process would be very complicated, and it became clear to me that we would have to talk to the specialists with the greatest understanding of anti-trust legislation in the world,” Castro Neves said.

  The Ambev executives’ lives had become particularly arduous thanks to the reaction of Kaiser. At the time, Kaiser was controlled by the Coca-Cola bottlers and was the third-largest brewer in Brazil. The Kaiser president, Humberto Pandolpho, publicly opposed the deal and wasted no time and money in undermining the new rival’s plans. Under his guidance, Kaiser produced a dossier that foresaw an upheaval in the beer sector. He commissioned a study that claimed the creation of Ambev would lead to 8,000 employees losing their jobs, a fall in tax revenues and higher prices for the consumer. The material was distributed widely to congressmen and opinion formers. Kaiser also acted on another front, the legal one this time, and filed more than 30 suits in different Brazilian cities, challenging the deal. While Kaiser was making a lot of noise, Ambev suffered in silence as it had reportedly been warned by the government not to turn the issue into a barroom discussion.

  Things got worse. In September 1999, two months after the announcement and at the height of the arm-wrestling match with Kaiser, Telles fell ill and was forced to step back from work for almost a month. It was not the first time something like this had happened. In 1985, when he was still working for Garantia, Telles underwent emergency surgery after being diagnosed with colitis. Fourteen years later, he showed the same symptoms once again. He had taken some days off to relax from the tension brought on by the purchase of Antarctica and pay off a bet to Miguel – if the deal went ahead, they would spend a few days fishing in Panama. He also planned to take advantage of the short break to go on a diet, as he had put on a few extra pounds during the process to create Ambev.

  Telles and his fishing companion were sailing through Central America on the yacht Sensation when he began to feel pain in his stomach region. The pain became unbearable and he had to see a doctor in the US. He spent two weeks in hospital until an American specialist discovered what had caused such pain. Telles had porphyria, a kind of progressive poisoning of the blood and a rare disease, difficult to diagnose. It turned out the colitis crisis that had led to the emergency operation years before – the combined effect of his diet and a fall in his glucose level had led the liver to go out of control, contaminating the blood – was caused by the porphyria, but once the problem was identified, Telles only needed to take a drug, which brought a quick recovery.

  Kaiser did not save ammunition in the media while Ambev’s commander was out of action, but a counterattack was perfectly timed with Telles’ return. The new brewer launched advertising campaigns to convince the public of the benefits that would come from the creation of Ambev. On top of that, in the Ambev “war room,” Juan Vergara, a Colombian who had taken Brazilian citizenship and was the company’s marketing director, had a spreadsheet with the names of all those people who should be contacted by Ambev representatives. The list, which included journalists, authorities and other opinion formers, was updated daily. Vergara wanted to know who was in favor of the agreement and how to change the opinion of those who had expressed their opposition to the “merger.”

  The dispute became more intense in November 1999, when the Economic Law Office, which is part of the Justice Ministry, recommended the sale of all the assets of Skol, including the brand, plants and distribution processes. If this recommendation was accepted by the Cade anti-trust regulator, then the operation would make no sense from Ambev’s point of view. What was the advantage of combining the two companies if the “cost” was losing one of the main brands?

  Telles and his team made an all or nothing attack. One of its most aggressive moves was to launch accusations in the American press against Coca-Cola, which owned a 10% chunk of Kaiser. (Although the Brazilian bottlers controlled the brewer, the Coca-Cola head office in Atlanta also had a small stake.) Telles himself stoked the flames.

  “Kaiser is trying to portray itself as David when it is in fact Goliath,” he told The New York Times in a report published at the beginning of 2000. He argued that, as the distribution of Kaiser Beer was in the hands of the bottlers of the Coca-Cola system, the two companies could not be separated. “Without Coca-Cola, Kaiser would die.” It was a painful blow to the world’s largest soft drinks manufacturer to have its name linked to sales of alcoholic drinks. The attack led Kaiser to rein in its attacks for a few days, at least.

  Following months of discussion, the Cade finally set Judgment Day on the creation of Ambev for March 29, 2000. It was impossible at that stage to know whether the deal would be approved and, if so, the restrictions that would be imposed. But when the day arrived, Kaiser announced that a Regional Federal court in São José dos Campos, upstate São Paulo, had issued an injunction suspending the judgment. If the Cade was to obey it, then the document had to be sent directly from the court to one of the regulator’s faxes. But there was a problem, Kaiser boss Pandolpho claimed. Cade’s fax machines were not working. He went on to say that the fax machines had been deliberately switched off to benefit Ambev. In its defense, the Cade even took pictures of the faxes, which were working, and showed them to journalists following the case. The Federal Police was called in to “escort” the fax machines and ensure that no-one interfered with their operation. One person who accompanied the situation closely said the machines were operating perfectly. However, what had happened was that for hours they had been receiving only dark pages – carbon paper sent directly from the Brahma head office to occupy the Cade’s phone lines and prevent the injunctions arriving.

  At the end of that day, after almost nine months of analysis, the government approved the creation of Ambev with some restrictions. The main one was that the Bavaria brand (that belonged to Antarctica) and its five plants should be sold to a single buyer. But this did nothing to dampen the spirits of Telles, Lemann and Sicupira, the controllers of the new Brazilian super brewer.

  Paris, New York,

  London, São Paulo and

  8,500 e-mails

  Buyin
g Antarctica was one thing. Turning Brahma and its former rival into a single company was another. Each brewery had its own production processes, sales, marketing and human resources and they all needed to be carefully consolidated. Telles chose Adilson Miguel to oversee the operation. Along with his team, Miguel analyzed all the details of how Antarctica worked and got to know its main executives closely. What he found out looked familiar:

  “Antarctica was exactly the same as the old Brahma. The same culture, the same professionals who were quite old, the same traditionalism... Nobody made any decisions, nobody made any money... I told Marcel we should use the same medicine and replicate everything that had been done when we bought Brahma. A lot of people from Antarctica stayed on after the merger, but they gradually left as they did not adapt to the rhythm.

  Those who were not accustomed to the Ambev style found it strange. Anyone who arrives at a company like this and thinks in the short term, about having a quality of life, for example, will have a difficult time. You will probably have to spend less time with your family than many people are used to but, on the other hand, you will have another kind of benefit. You will be looking after your future. You will earn a lot of money and your life will change. That’s what happened to those who chose the company style. Everybody gained a lot of money in this business.”

  In general, the Antarctica executives did not manage to become rich at Ambev. As time passed, few people from Antarctica stayed at the top of the new company. As foreseen, the Brahma culture prevailed.

  The new company had more muscle, offered new opportunities and began to translate the “big dream” idea that Telles and his partners repeated to exhaustion. The meritocracy that was preached in the former Brahma was brought to new heights. Competitiveness in the workplace was revived. Everybody was looking at the aggressive bonuses, promotions that would come with the expansion and, above all, the possibility of becoming partners of a company that seemed to have no limits to growth.