Dethroning the King (31 page)

There was at least one legitimate reason for Anheuser-Busch's public silence, however. It was cranking away furiously behind the scenes to identify alternatives to InBev's offer. There were a few possibilities—a deal with another suitor, for example, or some sort of tie-up with a big private equity firm. Anheuser had already decided to unveil the latest details of its Blue Ocean program to investors sooner than it had planned to help its cause. Only one option really looked viable: a purchase, at long last, of the 49.8 percent stake in Mexico's Grupo Modelo that Anheuser-Busch didn't already own.

A deal to combine Anheuser-Busch and Modelo, which brewed Modelo, Pacífico, and Corona Extra, one of the world's most popular beers, made sense for a whole host of reasons. They could cut plenty of costs by joining hands, and it would significantly broaden both companies' global footprints. Most importantly, there was a good chance that Anheuser-Busch and Modelo, combined, would be too expensive for InBev to swallow given the perilous state of the lending markets on Wall Street. Welding Modelo onto Anheuser-Busch could boost Anheuser's price tag by $10 billion or $15 billion.

“This was a totally feasible, realistic defense, because not only would it improve the stock price, the size of the company would be out of the zip code where InBev could finance a deal,” said one Anheuser-Busch advisor. Even if InBev were still somehow able to bid for both Anheuser-Busch and Modelo, it would make it nearly impossible for them to pay fully in cash. Sending InBev back to the drawing board—and making it either beg a bunch of struggling banks for more financing or issue shares of stock in a rough market—could ruin its effort entirely.

So rather than hearing gossip about how Anheuser-Busch was progressing with the evaluation of its bid, the few scraps of news InBev heard in those first few days after making its offer involved the name “Modelo.” It was worrisome. InBev's advisors professed that they could handle the Modelo threat. Yet some actually feared they couldn't. The financing markets weren't stable, and making a bid for Anheuser alone had been risky. Cobbling together enough money to buy Modelo on top of Anheuser-Busch could be nearly impossible. InBev had somehow barrel-rolled under the credit market's garage door just as it was closing shut. The chances that it could perform the same trick again—with much more cash at stake—looked slim.

The situation threatened to get particularly sticky for Lazard's Antonio Weiss, whose banking relationship with InBev over the years had been critical to his success as a merger specialist on Wall Street and in Europe. Weiss, a well-mannered banker and Yale graduate with perfect diction and a toothy smile, had been based in Paris for about eight years. He spent his daytime hours in the world of finance, but he also had one foot in the literary world as publisher of the
Paris Review
, the highbrow American journal. He had once apprenticed for the
Review's
well-known founder and editor, George Plimpton, who helped him win the affections of his eventual wife.

Weiss, a native New Yorker who clocked loops in his soccer cleats around the Central Park Reservoir as a boy, had advised Interbrew on the 2004 merger that created InBev. He was now, uncannily, facing off against the other two banks that had been involved in the deal—Goldman Sachs had also advised Interbrew, and Citigroup had been seated on the other side of the table, counseling AmBev. Weiss's fortunes had been tied to InBev for nearly a decade and a half. Back in 1994, when he had been a young vice president at Lazard with only a year or two under his belt, the firm was hired to represent Interbrew in the potential sale of Canadian brewer Labatt. Interbrew had been called upon as a potential “white knight” bidder to buy Labatt and save it from less desirable suitors, and a team at Lazard was assigned to the deal. The takeover eventually transpired, and as 1995 rolled around, a good deal of post-transaction clean-up work needed to be finished. Interbrew wanted to boost its stake in Mexican drinks company Fomento Económico Mexicano SA de CV (FEMSA) and sell some assets, and it wanted Lazard to manage the process. The team that had advised Interbrew on the Labatt deal, however, had suffered some turnover, and Weiss was suddenly pulled into the middle of the process. “You'll be sufficient,” Interbrew told Weiss, voicing confidence in the young banker despite his lack of proven experience. Weiss never forgot. From that point on, he and the company that ultimately became InBev had a symbiotic relationship—each, over time, helped boost the other's fortunes and cachet.

Weiss valued InBev as his most important client. The company was also now working with J.P. Morgan, but Doug Braunstein, J.P. Morgan's head of investment banking, was there more to pull together InBev's financing package than to offer strategic advice. Braunstein did happen to have a connection to Anheuser-Busch board member Sandy Warner, however, thanks to Warner's former role as chairman of J.P. Morgan Chase, and his position as a bit of an insider appeared to rankle Weiss at times. “There clearly was growing friction between the two of them,” said one person close to InBev. “There was a point in the process where Antonio didn't even want to talk to Doug, and basically said to Steve Golub [his Lazard colleague], ‘You know, look, you deal with Braunstein. I'm not going to deal with him.' ”

It was clear that Weiss was the banker Brito and his fellow Brazilians trusted most. And with so much on the line—not just InBev's money but also the reputations of everyone involved—a strategic misstep could prove disastrous. Wall Street's deal-making machinery tends to move in just one direction—forward—and as companies and their advisors get caught up in that momentum, they can lose the ability to retrace their steps or to walk away from a deal. If Anheuser-Busch struck up a deal to buy Modelo, it wasn't clear that Weiss could still advise InBev in good conscience to stick it out and press onward with the takeover. The deal would be much more difficult to close, the companies would be harder to successfully combine, and the debt required to finance the transaction would bury InBev for years.

Something had to be done to keep the pressure on Anheuser-Busch and force it to focus on InBev's offer, not on Modelo. The InBev team wasn't sure how serious the two companies' talks had gotten. To further muddy the waters, questions were starting to surface over whether Modelo had a contractual right, as Anheuser's partner, to block InBev's takeover attempt. InBev's lawyers didn't think the claim was valid, but all of the legal running-around had thrown a handful of sand in the gears.

There was one matter on which InBev was confident, however, and that's what it decided to use as a tool to regain the market's attention. Some of Anheuser's shareholders were bound to revolt if it tried to buy Modelo rather than taking the $65 per share offer already on the table. To ignite that group of investors, and perhaps compel them to lobby against Modelo before talks progressed any further, Brito made yet another courtesy call to August IV on June 15 and then sent out another carefully worded press release.

InBev, which had the “greatest respect for Grupo Modelo and its management,” it stated, had read reports suggesting that Anheuser may have approached Modelo about a deal. In light of those reports, InBev wanted Anheuser to understand that its offer was for Anheuser's current assets and business only, not for its business combined with some or all of Modelo. In other words, InBev was threatening consequences if Anheuser-Busch tried to pull a fast one and ink a deal with Modelo. Its intent wasn't to convince Anheuser to stop the Modelo talks, which InBev knew was unlikely, but to get Anheuser's shareholders to rally against them. They were staring at a quick and easy pile of cash for their stock. Why take the risk on a deal with the Mexicans?

Crafting that letter, and pretty much everything else that involved Modelo, was a tortuous process. InBev had “relationships everywhere” in the beer industry, as one advisor put it. It felt the opportunity to rile up Anheuser's shareholders, however, was worth the effort.

The warning was successful in seizing back the market's attention for a day or two, but it didn't illuminate anything new or novel for Anheuser-Busch or its stockholders. If Anheuser was going to buy the other half of Modelo, which it had repeatedly opted against in the past, it already knew it had only one shot do it right. Winning shareholders' trust was going to be a steep challenge. And that was only after assuming The Fourth could convince his own board that buying Modelo was their best option.

—Person close to Modelo

 

 

 

T
hankfully, Anheuser-Busch had been keeping the idea of buying the rest of Modelo on ice for decades. The Fourth and his deputies understood the concept intimately, since it had been considered countless times over the years and then stuck back on the shelf in each instance. Part of the reason for the company's paralysis was that the five Mexican families that controlled Modelo had never been willing to sell. Anheuser, however, had never put a compelling offer on the table. Now, The Fourth was eager to convince Modelo that it was time to set the companies' fractured history aside and get serious.

Anheuser's board was already well aware of the Modelo option. During a meeting two weeks earlier, when they had first convened to address the rumors of InBev's bid, they had discussed whether a deal to merge with Modelo could keep InBev at bay.

So in an attempt to salvage both the company's independence and his reputation, August IV told Tom Santel, the head of Anheuser's international business, to pick up the phone as soon as the ink dried on InBev's offer and call Carlos Fernández González, The Fourth's counterpart at the Mexican brewer.

Fernández, Modelo's 41-year-old chairman and CEO, had been expecting the call and had done some prep work in advance. On June 10, the day before InBev's offer came through, Fernández had met with Robert Kindler, a top banker from Morgan Stanley whom Fernández had summoned to his family office on the picturesque Paseo de la Reforma in Mexico City. Kindler caught a 1 A.M. Mexicana Airlines flight that morning out of New York's John F. Kennedy airport in order to be there on time, a tough pill to swallow even for a road warrior who had spent countless hours traveling as an investment banker and, before that, a corporate attorney. To rub an extra bit of gravel in his bleary eyes, there was no driver waiting to pick him up when he landed at the crack of dawn. He had to hitch a ride to his hotel with a few bankers from UBS who also happened to be arriving in the country's smoggy capital on business.

Fernández wanted to prepare that day for what Modelo felt was inevitable: a bid by InBev for its partner and majority owner, Anheuser-Busch. Once InBev made an offer and the fireworks started, Modelo wanted to ensure that it could stay relevant and maintain some negotiating leverage rather than getting trampled.

“We knew it was coming,” said one person close to Modelo. “I mean, everyone in the world knew that InBev was making a bid. There was no secret to it—months before that, not just then.”

Kindler and his team at Morgan Stanley, which included bankers both in New York and on the ground in Mexico, had agreed to advise Modelo several weeks earlier after David Mercado, a partner at Cravath, Swaine & Moore, the white shoe firm where Kindler had once practiced law, called to see whether Morgan Stanley had any conflicts that would prevent it from taking the assignment. By hiring Kindler for advice, Modelo had aimed straight for the top—he was one of Wall Street's highest profile and best-connected strategic minds. The Queens-bred Kindler wasn't your typical Ivy League banker, though. He had an aversion to neckties and preferred to brag about his stand-up comedian brother Andy rather than talking business.

Kindler's team hadn't been given much of a head start, but it didn't take long to grasp Modelo's strategic options. The Mexicans had hashed through the scenarios for a deal with Anheuser-Busch numerous times, and they had their priorities clear. By the time Santel called Fernández, Modelo had primed its pump and was prepared to hear what he had to say.

Anheuser-Busch's relationship with Modelo stretched back to March of 1993, when Anheuser paid $477 million for a 17.7 percent stake in the company. At the time, the deal pegged Modelo's equity value at $2.65 billion.

Modelo had already ballooned by then into Mexico's biggest brewer, and the venture represented an effort by Anheuser, which controlled 44 percent of the U.S. beer market, to find better ways to grow as opportunities in the United States became tougher to come by. The deal was celebrated north of the border as an insightful way to boost Anheuser-Busch's exposure to a rapidly expanding new market. And while the companies' pact had holes in it that came back to haunt both parties over the years, the investment proved to be one of Anheuser's smartest strategic plays. It secured the right to boost its stake in Modelo to just more than half of the company when the deal was first signed, and while it took a few years and at least one threat of arbitration, that's what Anheuser eventually did.