DREAM BIG: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz
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A report in Exame magazine published in December 2000 highlighted the high state of mind of the new team with the “knife between their teeth” and “fire in their eyes.” A lot of staff worked more than 10 hours a day and during the weekends, even changing their towns and countries of residence to achieve their targets. But the way the bonus system was structured at the time, only half of the employees eligible for a bonus would actually receive it and it was made clear that if some were to win, others had to lose.
As had occurred at Garantia, even jokes and pranks could be rather hostile. One of the habits during the internal MBA course the company offered to its 50 best talents was to throw felt tomatoes at colleagues who said silly things. The one who had made the most gaffs and was at the receiving end was made fun of. “The company needed strength, hard work and new people at that time,” Rodrigues said. “Was it too hard? Yes, I admit it was, but the way of compensation was also marvelous.”
Ambev was fined several times in court over the years for cases of moral harassment of employees. For example, the Supreme Labor Court ordered the company to pay a fine of R$ 100,000 at the beginning of 2012 to a former salesman who had been publicly humiliated by his colleagues when he did not achieve his targets.
In any case, the gains for those who exceeded their goals were exceptional. The brewery always paid salaries that were slightly lower than the market rate, but the variable remuneration, which could reach 18 extra salaries a year, easily offset this. The system was adjusted a number of times over the years, but the basic principles remained. The bonuses were generally used by the employees to acquire shares in the company, but this was encouraged by the fact that there was always some “obstacle” for redeeming the shares in the short term. The current practice is for those who use the whole bonus to buy shares in the company to gain an extra 10% over what they have bought. The catch is that this premium can only be redeemed after five years, and those who leave before the period have to give up the extra shares they received.
“It is not written anywhere that you are obliged to use the bonus to buy shares, but everybody knows that this is what is expected,” said a former partner. “Acquiring them is a sign that the employee believes in the future of the company.”
The profit increased year after year. (The result was positive, even in 1998, when bonuses were not awarded.) The company had 70% of the domestic market and needed to pursue new opportunities outside Brazil. Intensifying the expansion through Latin America seemed the obvious path to follow. Since 1994, when Brahma opened a small operation in Venezuela, it had continued to expand internationally, and the time had arrived to speed up the process. In 2001, Ambev bought Cervecería Nacional in Paraguay, and took a step further in 2002 when it acquired 36% of the Argentinean brewer Quilmes. The purchase of the Argentinean rival was steeped in controversy. One of the Quilmes shareholders at that time was the Dutch company Heineken, which held a 15% stake.
For Heineken, which was concentrated in the mature European market, expanding to other regions was essential – and just handing Quilmes over without any fight was not part of its plans. The Dutch applied to the International Chamber of Commerce in Paris to try and prevent Ambev from buying a part of the Argentinean company. It failed. Ambev acquired Quilmes and even bought the Dutch’s company’s 15% stake several months later.
The city of Boulder, Colorado is surrounded by mountains and is home to over 100,000 people. For more than a decade, Ambev executives and controllers have been traveling to this quiet spot to take part in a workshop with Jim Collins, author of business classics Built to Last and Good to Great, and an old acquaintance of Lemann.
At the meetings he chairs in Boulder with Lemann and his team, Collins uses the Socratic method of asking questions and helping the participants to reach their own conclusions. One of the questions Collins raised during the workshop held in December 2002 left Telles particularly disturbed. The guru asked the group what Ambev’s main problem was.
Telles thought for a few moments and gave the following answer: “The great problem is that we have excellent people and a brand new executive board, but I don’t want to lose those great people we are forming.” Telles realized that the ambitious young people he had devoted so much time to create would not wait for long for career opportunities to arise. The conclusion was inevitable: either the company grew with one big jump and provided a chance for more people to rise or it would lose some of the best professionals. Ambev needed to do something bigger and faster than the acquisitions in Latin America. Telles thought it was the moment to hold a meeting with an old acquaintance, Alexandre van Damme, a member of one of the three controlling families of Belgium’s Interbrew, producer of the Stella Artois and Beck’s brands.
The two had got to know each other at the Lazard bank office in New York in 1995. At that time, both Brahma and Interbrew were “flirting” with Anheuser-Busch from a distance. Neither was in a position to buy the American giant at the time, but the Lazard bankers thought there would be no harm in putting the Brahma and Interbrew controllers in the same room.
Nothing came of those conversations, but Telles and Van Damme started to keep in touch, and when they were in New York in early 2002, Telles invited the Belgian to have breakfast at a hotel. When Van Damme arrived, he found Telles was accompanied by two people he did not know – Lemann and Sicupira.
The possibility of a deal involving the two companies was not discussed, but following the meeting in New York, it was Lemann who began strengthening the relationship with Van Damme. He invited him to watch the samba schools at the Rio Carnival from the Brahma VIP lounge. Later, they spent sunny days with their respective families in the Hamptons, a luxury coastal area near New York, and met in the Swiss Alps in the middle of that year. Personality wise, Van Damme was himself adverse to exposure in the press and liked the discreet and down to earth style of the three Ambev controllers. A valuable link was forming.
Interbrew was at a turning point. It was the third-largest brewery in the world in volume, but did not act as a single company. Following a series of acquisitions in Eastern Europe, Asia and Canada, it seemed to have become a “federation of companies” without a single culture. Investors and analysts felt that it had paid a very high price for acquisitions around the world, which it had not managed to integrate.
This movement was due, to a large extent, to the interference of the three controlling families in the management. Interbrew’s origins dated back to the 14th century and was dominated by the Van Damme, Mevius and Spoelberch families. There were almost 500 members of these families, many of whom had aristocratic titles. As is usually the case with aristocratic clans, where barons, counts and viscounts spend their time shooting pheasants, they had expensive habits. The rule at the brewery was opulence. Meetings of executive and board of directors took place in luxury hotels, often with an accompanying champagne service. There were so many interests to reconcile that the CEO’s position became a kind of electric chair. Five people had held the position in less than two decades.
The scenario was perfect for a project, and Lemann suggested the possibility of the two companies uniting at a meeting with Van Damme in May 2003. Although he did not go into the details of the format of the deal, shareholder composition or governance, the Belgian, who was virtually an ally by that stage, liked the idea.
Each side nominated a reliable person to begin the negotiations. The Brazilians chose Thompson. The Belgians chose Remmert Laan, a Dutch partner in the Lazard bank and a member of the Interbrew board of directors. Some weeks after the conversation between Lemann and Van Damme, Thompson and Laan met in Paris, in a meeting room at the Le Bristol hotel, a traditional five-star accommodation located in the rue du Faubourg Saint-Honoré. The meeting place was practical, as the hotel was discreet, and less than 500 meters (slightly less than a third of a mile) from the Lazard office and discreet. They met four times at this hotel over a month and spoke by phone many other times. But the deal faltered.
“We had a first round of conversations and did not reach any agreement,” Thompson recalled.
Two months had passed without them speaking until Laan phoned the Brazilian in September 2003 and suggested they resume the conversations. Thompson returned to the Le Bristol hotel:
“We had two pieces of paper. One was for the financial question regarding how much our share of the new company would be worth. The other paper was on the governance: How would the new board of directors be made up? What functions would it have? And, how would the holding company we create with the Belgians operate? We established that some things could only be defined unanimously such as, the selling of the company. All these questions of governance were very important because there would have been no point in having a percentage of X of the company if the company did not work. We wrote these two pages and took them to the shareholders and told them they had to get to know each other better. Jorge, Marcel and Beto knew Van Damme but not the members of the other families. The three had a meeting at the end of September with Van Damme himself, Philippe Spoelberch and Arnoud de Pret de Calesberg (representative of Melvius). After this, the negotiation accelerated.”
At a meeting held in Spoelberch’s house in Brussels in the first week of October 2003, the three leaders of each brewer, accompanied by Thompson and Laan, outlined the basis for the contract. It was only then that the bankers and lawyers entered the scene. The Belgians’ financial advisors were Lazard Frères and Goldman Sachs. The Brazilians hired Citibank from New York (where former Garantia staffer José Olympio Pereira worked) and Luis Rinaldini, an Argentinean raised in the US who had become famous at Lazard, where he worked for more than two decades, but had recently left to open his own company. A meeting between the two brewers’ bankers and the negotiators was held in the head office of the Cravath, Swaine & Moore law firm in New York on October 15, and marked the official beginning of the negotiations. Around 30 people were in the room. Lemann represented the three Ambev controllers.
Aloysio Miranda Filho, partner of the Ulhôa Canto law firm, was responsible for advising Braco, the holding company that brought together the stakes Lemann, Telles and Sicupira held in Ambev. (BR Global is the holding company that currently plays this role.) From then on, Miranda Filho, a former pupil at Colégio Santo Inácio where he was a contemporary of young men who were to become the partners in Banco Garantia, including Fernando Prado and Marcelo Barbará, devoted his energies exclusively to this transaction. Almost 50 people from his office were involved in the process. Ambev’s legal advisor was lawyer Paulo Aragão.
The legal aspects of the deal were as complex as the financial structure. Ambev had shares listed on the São Paulo and New York stock exchanges, while Interbrew was listed on the Brussels stock exchange, but the fact that the companies had operations in different countries proved to be a real logistical problem.
“We had meetings all over the world: Paris, New York, London, São Paulo,” Aragão recalled. “By the end, there were lawyers from 16 different countries at the table... 8,500 e-mails were exchanged during six months of negotiations.”
Cravath coordinated the work at the international level. There was still another final lawyer who had to approve all the documents: a Swiss called Peter Nobel. He was a graduate of the University of St. Gallen and, for 12 years, was a member of the federal commission that regulated the financial sector in Switzerland. He was an old acquaintance of Lemann and enjoyed his complete confidence.
One of the Ambev controllers’ concerns was how the Brazilian government would react to the deal. They thought it would be wise to check in advance and avoid future problems, as they still recalled the wear and tear of the months awaiting the approval of Brahma’s purchase of Antarctica. In January 2004, Sicupira traveled to Brasília to meet the then head of staff, José Dirceu. Sicupira had become close to a number of government representatives since 2000, when he created the Brava Foundation, a NGO that supports management projects in the public sector. He outlined the general lines of the transaction to Dirceu and wanted to have an idea of the federal government’s position should the deal go ahead. He received the green light from President Lula’s right hand man. That left it up to the Belgians.
Even with everything conspiring in its favor, concluding a transaction of that magnitude with so many people involved was an extremely complicated task. By the end of the process, almost 500 professionals had taken part in the transaction, including lawyers, bankers, executives, auditors, marketing and public relations people. The wording of the shareholders’ agreement between Braco and the Belgium families, which needed to reconcile the interests of dozens of members, was a headache. The Braco advisors ended up proposing that the agreement should only be signed after the final announcement of the deal between the breweries. Nobel, the Swiss lawyer who was advising Lemann, vetoed the idea. He considered it too risky to go ahead before all the interests were aligned. Miranda Filho went to Belgium to talk to representatives of each family in order to get a consensus.
“The transaction almost did not go ahead many times and there was still confusion until the eve of the signing,” Thompson recalled. “At two o’clock in the morning, a guy from one of the banks said he couldn’t go along with a point that had already been agreed upon. This led to a shouting match...”
After innumerable comings and goings in the middle of the night, the transaction was concluded on March 2, 2004. Lemann, Telles and Sicupira were not present when everything was decided. Miranda Filho called Telles, telling him that it only needed the signatures. Over 100 members needed to initial the agreement on the Belgian side. “Aloysio, you are the lawyer... make a speech and propose a toast, because I am going to sleep,” Telles said, exhausted.
In the morning, Telles, Sicupira and Lemann separated to advise key people before the deal was officially announced. Sicupira phoned the shareholders of the Mexican company Modelo. Lemann was in Zurich and called friends, such as the mega-investor Warren Buffett. Telles informed August Busch IV, the CEO of Anheuser-Busch. Busch IV and Telles had dinner at a restaurant in London that same night and the Brazilian businessman told the American how the new global giant had been created.
In 1999, when Brahma bought Antarctica to create Ambev, the company’s shareholders and executives were submitted to public scrutiny. Regulatory bodies, politicians, investors and consumer defense associations all showed an interest in the deal and were, generally, against it. An enormous public relations effort was needed with opinion formers to reverse this situation. The announcement of a partnership between Ambev and Interbrew had an even more dramatic effect – this time on a global scale. The general reaction when the companies officially announced their “merger” on March 3, 2004, was one of astonishment. Although the news of an upcoming share swap had been published some days previously, the details were still unknown, yet it was exactly these “details” that made the deal so controversial.
Through the share swap, Interbrew and Ambev, respectively the world’s third and fifth-largest brewers in terms of volume, created a new company that was born as the leader of the beer sector (Anheuser-Busch remained ahead in revenues). The new company was initially called InterbrewAmbev – the name InBev was adopted some days after the announcement – and it had annual revenues of almost US$ 12 billion, operations in 140 countries and a 14% share of the beer global market. The company was a giant with superlative numbers, wherever you looked. However, the question that buzzed in the heads of investors, analysts and journalists concerned who would be in charge.
The transaction between Ambev and Interbrew, the biggest in history involving a Brazilian company, had a structure that seemed nebulous. Braco, the holding company of Lemann, Telles and Sicupira that controlled Ambev, sold its stake of 52% in the Bra
zilian brewery to the Belgians. In exchange, it bought 25% of Interbrew shares. The deal also foresaw Labatt, a Canadian brewery that belonged to the Belgians, being incorporated by Ambev (with the Brazilian brewer assuming a debt of around US$ 1.5 billion from Labatt). Ambev would continue to operate as a separate company, listed on the stock market with its own executives. When the numbers were analyzed in the cold light of day, they showed that Interbrew was now the owner of the Brazilian brewer, although the three Brazilians had managed to obtain a big share in the new company.
The question then concerned InBev’s corporate governance rules, which did not make clear who would be the boss. The shareholders’ agreement that was valid for 20 years, established that control would be shared. The board of directors would have four members representing Braco, four representing the Belgians and six independent members. The CEO of the new company would be an American, John Brock, who had spent two years running Interbrew. The recently created convergence committee, set up to unify the culture of the two companies and standardize the operations, would be under Telles’ supervision. The new company’s head office would be in Leuven, where Interbrew was based.
The distribution of the capital, the choice of CEO and the decision of where the head office would be located gave clear signs that Ambev had been bought. This appearance was strengthened when Brunswick, Interbrew’s English PR agency, announced the deal in Europe early in the morning and described it as an acquisition. Due to the time difference, the Belgian version had spread throughout the world when journalists in Brazil met in the Hilton hotel in São Paulo to hear what the Ambev’s executives had to say. It was complete confusion. Within a few hours, Máquina da Notícia, the communication agency that Ambev had hired in Brazil, was forced to expand its team involved in the operation from 12 to 48. (The international promotion was in the hands of an American company called Edelman.)