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

  The two spokesmen at the press conference were De Marchi and Brito, who had become Ambev CEO a year earlier, succeeding Rodrigues. Alongside De Marchi and Brito onstage were banker Pereira and lawyer Aragão. Those watching the interview still remember how confusing everything seemed. The Ambev people tried at all cost to argue that the company had not been bought, but the journalists applied further pressure. How was that possible if Interbrew would be the biggest shareholder in the Brazilian brewery? Furthermore, if Ambev had been created years before to, supposedly, protect itself against foreign competitors, and to form a “Brazilian multinational,” how could they justify the agreement with the Belgians? Ambev’s view that it was a merger did not convince anyone.

  The employees at Ambev’s office were also surprised by the news that Wednesday morning. A big screen transmitted the press conference in Brussels, led by Brock and Telles. Shortly afterwards, a video was shown that Telles had taped earlier. The lounge – filled with tables and free drinks available – was taken over for a lively happy hour in which there was no shortage of toasts with the Brahma and Stella Artois brands. An advertisement went on the national television network that night starring well-known Brazilian actor Antonio Fagundes, which tried to explain the benefits of the deal to the public. This publicity campaign was carried out by the advertising specialist Duda Mendonça, who spoke regularly to President Lula at that time.

  Newspapers throughout the world questioned the format of the deal and the amounts involved. Braco’s stake in Ambev was valued at around US$ 2 billion, but the three businessmen received US$ 4 billion in InBev shares. (The difference was due to the “control premium.”) At the same time, some analysts felt Ambev had overpaid for the Canadian company Labatt. They calculated the price at a multiple of 11 times the company’s cash generation, which compared with the sector average of less than eight times. The result of so much distrust was reflected in the brewers’ share prices, which plummeted.

  With the shares falling, the euphoria dissipated. Those employees who had used a large part of their bonuses to buy shares saw the value of their assets halve from one hour to the next. Rumors then started. Was it true that Lemann, Telles and Sicupira had really sold Ambev to Interbrew?

  A contingency action plan had to be put into motion to calm things down inside and outside the company. Telles’ message was transmitted within Ambev by Brito and was more a plea for confidence than a rational explanation. He simply asked the employees to believe in him.

  “I used up all my credibility there,” Telles said. “Thank God I had some in stock.” Although he knew that InBev’s management would end up in the Brazilian hands, he did not want to say publicly that this was the plan and risk creating an unnecessary conflict with the new partner.

  De Marchi began a marathon of visits to the editors of the main Brazilian newspapers to explain the operation. Brito, usually averse to journalists, gave exclusive interviews to some of the largest media outlets. Lemann went personally to give details of the agreement to media barons such as Roberto Civita, owner of publisher Abril. The press was in uproar. In the war room that was organized to deal with journalists, 482 requests for information and interviews were received in the first 48 hours after the announcement.

  No criticism was felt more sorely by Lemann than the article published in the British magazine The Economist a few weeks later. It reported that the Brazilian capital market – which allowed two classes of shares: common (known as ON, with voting rights) and preferred (PN, without voting rights) – discriminated against minority interests. It highlighted this anomaly in the Ambev case. Under the Listed Companies law that regulated those companies traded on the Bovespa stock market, Interbrew made a public offer to buy the common shares (with voting rights) that were not in the hands of the three businessmen, but offered only 80% of what it paid them. The problem was that the law did not oblige the brewer to extend this “tag-along” right to the owners of the preferred shares (without voting rights). As a result, those shareholders who had PN shares felt they had ended up with “high-priced junk,” to use the magazine’s description.

  The situation worsened in the following days, as the common shares soared and preferred ones went into free fall.

  “I have seldom seen Jorge so annoyed about a report,” said somebody close to him. Lemann felt the minority shareholders’ complaint made no sense, since they had known the restrictions attached to these shares when they bought them.

  “It is like buying a Fiat and thinking you have the right to have a Ferrari in the garage,” he often said about the subject.

  The Economist article expanded complaints worldwide by minority shareholders, such as Previ, the powerful Banco do Brasil pension fund that held around 8.8% of Ambev’s total capital (almost all in PNs). Previ had publically stated its displeasure since the announcement of the agreement. It believed the transaction had only benefited the three controlling shareholders. The biggest fear of Lemann, Telles and Sicupira was that the outcry would end up in court and transform into a war of injunctions, which would put the continuity of the transaction at risk. They wanted to avoid, at any cost, the kind of battle that had arisen when Brahman bought Antarctica and Kaiser built up a series of legal arguments to delay the acquisition’s approval by the consumer defense bodies. Telles suggested that Ambev hire lawyer Sergio Bermudes to look at the agreement from the viewpoint of a minority shareholder, and gain an in-depth understanding of all the details in a bid to find any possible breaches. (One side effect of Telles’ tactic was that Bermudes, one of the most famous lawyers in Brazil, would be unable to represent Previ.)

  There was nothing that obliged Interbrew to give special treatment to the owners of the preferred shares, so the minority shareholders had to settle down and accept the situation. The shares, eventually, started to rise again, and have appreciated since then by almost 700%, compared with 150% for the Ibovespa index.

  The three businessmen also had to deal with another problem. The Brazilian Security Exchange Commission (CVM) opened administrative processes to investigate the use of privileged information by the three, and other alleged irregularities that may have occurred during the negotiations with Interbrew to the benefit of the Ambev controllers.

  At the end of 2009, Lemann, Telles and Sicupira reached an agreement with the CVM to end the proceedings and made a payment of more than R$ 18 million. A lot of people saw this outcome as an admission of guilt. Lawyer Aragão, who defended them in the case, had another explanation.

  “The formal assumption of the CVM’s commitment terms is that it was neither an admission of guilt or recognition of innocence,” he said. “Our aim was simply to end the matter.”

  Over the decades, Lemann and his partners were used to buying companies and imposing their culture of meritocracy. When Garantia bought Lojas Americanas, Sicupira had complete freedom to stamp his style on the retailer. Within a short time, he swapped the main executives, changed the variable remuneration system and established goals for the employees. A similar script was followed by Telles years later, when the bank acquired control of Brahma. In both cases, Sicupira and Telles were to all intent and purpose the new owners of these companies and could do what was needed to improve their results. They did not have to deal with other shareholders or concern themselves with being popular. The employees who did not like the new rules were free to go.

  However, the Interbrew deal required another approach. This time, they were not the conquerors. It was Ambev that had been bought, and the Brazilians could not simply walk into InBev’s head office and impose their thinking. Subtlety, diplomacy and a certain amount of patience were essential. The game would have different rules from those to which they were accustomed. They needed to adapt to the new terms.

  Shortly after the deal was concluded, representatives of the three Belgian families accompanied Lemann, Telles and Sicupira on a trip to Colorado to take part in one of the traditional workshops with Jim Collins.

  “Jorge said
we needed to create a single culture in the company and that the board of directors would be the best starting point to do so,” said Collins. As he was one of Lemann’s mentors, there was nobody better to help unify this thinking.

  Under the rules established in the agreement, Brock, the American CEO of Interbrew, would be in charge of InBev. On the other hand, the main financial executive would be Felipe Dutra from Ambev. The integration committee, led by Telles, immediately tried to identify the best processes and people from each company.

  “It was clear to the top Interbrew executives right from the start that, although the main decisions would be taken jointly by all the shareholders, the Ambev management style would end up prevailing,” said a person close to the Belgian families.

  Not all the Interbrew side approved of the Brazilian interference. As the presence of Telles, Dutra and other Brazilians became more apparent at the InBev head office, the resistance spread to all levels of the company. Employees of the former Interbrew, from the bottom to the top, were shocked by the practices they regarded as aggressive and too greedy. They were used to stable employment, a balance between their professional and personal lives and a rich government that was able to guarantee health, education and security for all citizens. The Brazilians’ frenetic pursuit of money made little or no sense to them. The traditional “carrots” – fat bonuses and the possibility of becoming a partner in the company – had no appeal.

  “They want to reduce our fixed salary and increase our variable remuneration, but we are not interested in gaining a bonus,” a plant worker in Leuven said, summing up the feeling most employees had at the time. “If they want to fire us as a result of this, there is no problem because the state will provide us with all we need.”

  The atmosphere was also one of conflict at the executive level. The Interbrew people did not remotely approve of the ending of perks such as flying business class (now authorized only to flights of more than six hours), the disappearance of individual offices, the absolution of hierarchy between executives and other employees and changes in the variable remuneration system (which included, bonuses no longer being paid in money but in shares). A Belgian executive even complained publicly about having to share a room with his workmate during a company event held in São Paulo months after the creation of InBev. Things were really changing.

  “Some people liked it, and most hated it, but our culture is unchangeable,” said Telles years ago.

  Although Telles had no executive position during this phase, he worked at the brewer on an almost daily basis. He got to know the different operations worldwide. He spoke to employees. He wanted to see how each area operated closely. It was as if he was once again involved in the integration of Brahma and Antarctica, only on a global scale. The integration committee met every month to discuss the advances and next stages. (It was only dissolved three years after the formation of InBev.)

  The first results of the Brazilians’ interference quickly began to appear. Earnings in the first half of 2005 increased by 11% over the same period of 2004, when the transaction was announced, while sales expanded by 5.5%.

  Not only were Telles and his partners making efforts to persuade the Belgians to adopt their ideas, but they were also active on another front, gradually increasing their equity stake in InBev. They had begun buying the company’s stock on the market shortly after the announcement of the creation of the new brewer and had become InBev’s largest individual shareholders in less than a year.

  Their advances – carried out by increasing their equity stake and influence on the management – led those executives who were still resistant to the new model to leave. Those who were unhappy gradually started leaving, as Telles and his partners had imagined would happen. This left room for all those “pent-up” talents at Ambev to finally find opportunities. People such as Miguel Patricio, Claudio Garcia and Juan Vergara – all Ambev veterans – assumed global positions at the top level at InBev.

  The most symbolic ascension was that of Brito to the position of CEO, which was announced in December 2005. The fall-out in Belgium could not have been worse. “Investors and journalists said that the Brazilians, who had been initially bought by Interbrew, had actually been seen to be cleverer and had taken control,” said a person close to Interbrew’s controlling families. “However, the Belgian shareholders thought the best people should be in command, regardless of the color of the passport.”

  Brito had been prepared for the position for some time, having assumed command of Ambev in 2003. He was called for a conversation with Telles the following year, shortly after Interbrew had bought Ambev and given one of his “invitations” that could not be refused:

  Telles: “Brito, you are number one in Brazil. Now the company has changed and you need to prove yourself outside Brazil as well. So you should go to Canada and take care of Labatt.”

  Brito: “But Marcel, Canada? Canada is very small compared with Brazil!”

  Telles: “If you want to be the global CEO of the company one day, you will have to prove yourself outside Brazil as well.”

  Brito believed in his boss and went with his wife and children to North America. Little after one year later, he became the main executive in InBev worldwide.

  The question “Who runs the company?” – repeated innumerable times by analysts, journalists and investors soon after the announcement of the transaction between Interbrew and Ambev – began to receive a reply.

  The one billion dollar

  reward

  A few months after Interbrew bought Ambev, Lemann, Telles and Sicupira decided to open an investment company in the US. The aim was to allocate part of their assets directly in American companies, and not only through funds, as had been the case until then. There was no shortage of people to run the new enterprise. Alexandre Behring, the man who had transformed ALL from the scrapheap into one of the most valuable railway companies on the Brazilian capital markets, had just handed over the position of CEO to Bernardo Hees and was ready for a new adventure. Thanks to his previous experience as a partner in GP Investimentos, Behring knew how to identify companies in distress, where a radical change in the management could boost their results.

  Behring’s suggestion was to transform Sinergy, created in New York in 1997 by Paulo Lemann, Jorge Paulo Lemann’s son, into a private equity fund. (By that time, Paulo Lemann had left the American company to found the asset management Pollux.) Great care had to be taken, as the three partners did not want to repeat GP’s experience when it overstretched itself with investments in the US. The American fund should concentrate on a select few choices. As a result, 3G Capital was born. The name refers to the three former Garantia owners.

  As with the previous firm, the model would also be a partnership, and Thompson and Behring were the first partners of Lemann, Sicupira and Telles in the new enterprise. The beginning of 3G was an experimentation and learning phase. The firm’s office was located on the 31st floor of a building on Third Avenue in the heart of Manhattan, from which Behring bought some small stakes in American companies, such as Coca-Cola. These were modest purchases that would not allow 3G to interfere in the management. Nevertheless, they brought the Brazilians closer to American corporations. To help him in the business, Behring assembled a lean team of less than 40 people. (During its history, no 3G employee attracted as many headlines as Marc Mezvinsky, who would later marry Chelsea Clinton, the daughter of former president Bill Clinton, in 2010. Months later, Mezvinsky left the company.) Right from the beginning, Lemann, Telles, Sicupira and Thompson set a routine to follow the new investment through a weekly teleconference with Behring, usually on Tuesdays, to discuss all the fund’s initiatives.

  3G’s first and most visible movement occurred in December 2007, when it bought a 4.2% stake in the capital of CSX, the third-largest American railroad. CSX had revenues of more than US$ 10 billion, but it was an ageing company. Behring thought it represented an American version of the Brazilian company ALL – a story he knew well. T
he question was whether they could repeat that story with CSX.

  Behring would need a bigger stake than 4.2% of 3G to run the company. So, right from the beginning, he designed a deal in which he would have the presence of another partner. This was the Children’s Investment Fund, known as TCI, an activist fund based in London that already held 4.1% of CSX’s capital and had been trying to have a say in its management for some time. 3G and TCI believed they could jointly control the company, as the capital was widely spread among a large number of investors. However, neither the CSX board of directors nor its executive board were ready to succumb to these two shareholders. A long legal clash between the sides began. While the battle continued in the courts, the most that 3G and TCI could accomplish was to win four seats on the board of directors, one-third of the places available. As they were in the minority, they could suggest adjustments, particularly a cost-cutting program, but they could not get their way entirely.

  Two years later, TCI gave up and sold its stake in the railroad and was followed by 3G in 2011. The investment 3G made in CSX gave a return of around 80% in less than four years. Although this was a good return in financial terms, the Brazilians had been unable to set the company on the path they wanted, so for the partners, it was a rather frustrating outcome. It was more or less what had happened 30 years earlier when Garantia acquired small stakes in São Paulo Alpargatas and the retailer Lojas Brasileiras. As their shareholding had not been big enough to interfere in the running of the companies, they decided to leave in both cases.

  Behring needed to look for another good business, but this time, it had to be one that he could actually run.