Dethroning the King (32 page)

“That was a great acquisition—a $1.6 billion investment for 50 percent of Modelo, later worth something like $13 billion,” said Jack Purnell, who orchestrated the deal as head of Anheuser-Busch's international business at the time. “That's the reason I'm still thought of well around the company.” Don Antonino Fernández, the Mexican patriarch who had been CEO of Modelo at the time of the deal, emerged looking decidedly less victorious, and the perception that Modelo had allowed itself to get hoodwinked only worsened as the years passed.

Modelo had faced several threats in the early 1990s that made it amenable to the deal. The North American Free Trade Agreement (NAFTA) was undergoing final revisions in Washington, and many Mexican companies were concerned about how they would compete against U.S. products that might flow into their market if both countries slashed import taxes. Modelo was also expanding and building new breweries, and its aversion to debt made it eager to find cash to fund those efforts. Mexican beverage maker Fomento Económico Mexicano SA, or FEMSA, furthermore, had already sold a 7.9 percent stake to Miller. If Modelo's biggest rival was going to tie up with the second-biggest brewer in the United States, the best way for Modelo to top it was to ally with No. 1 Anheuser-Busch.

Anheuser-Busch had plenty of reasons to need Modelo, too. Despite their differences, both companies shared a particular history. They had swelled into the 500-pound gorillas in their respective markets by expanding and improving their own businesses, not by acquiring others. It took scrappiness and fortitude to do that successfully, and both companies had struck upon winning recipes.

More importantly, however, Anheuser had buried itself in a pile of efforts to sell Budweiser abroad that added up to relatively little. It needed a better way to snag some foreign growth for itself, and Mexico's thirsty crowds were pushing beer consumption upward by 6.5 percent a year. The Third's archrival, Miller, was moving much more aggressively to take advantage of this type of global expansion.

When The Third finally pulled the trigger and bought into Modelo, it marked a refreshing change for Anheuser staffers who had grown tired of chasing their tails on deals that never happened. The tie-up took several messy years to come together. Negotiations were plagued by stops and starts. Agreements were reached in principle, and then disputes arose over agreements. August III and Jack Purnell jetted down for meetings with representatives for the families that controlled Modelo in cities ranging from Guadalajara to Cabo San Lucas. And The Third turned repeatedly to his beloved dialectics to determine whether the investment was worthwhile, pitting teams of executives against each other to debate the matter. Purnell and his staffers conducted three separate month-long reviews on the Modelo deal over a span of two years.

“There were problems over control initially,” Purnell said, which was hardly a surprise given The Third's historic tendencies. “August was very much a hands-on manager, not a big delegator. He wanted control, but later on, after taking a trip to Mexico, got comfortable not having control.” August's willingness to let Modelo take the driver's seat was atypical, since his inability to cede control had torpedoed most of the other deals Anheuser-Busch had considered. Part of his decision stemmed from the political situation during that era in Mexico. The companies felt Modelo might be able to deal more effectively with Mexican President Carlos Salinas and other top politicians, who were heavily enmeshed in the business sector, if it remained under Mexican control.

The debate over who would pull Modelo's puppet strings, once resolved, gave rise to another sticking point in the talks. If the Mexicans were going to stay in charge of their own business, August III thought it only seemed fair that they should get less money for the stake they were selling. Disagreements on pricing stalled the talks for a long time, but “eventually,” Purnell said, “they came around to our price.” Modelo's willingness to take a lower offer finally got the deal done. The fact that Anheuser had secured sweet financial terms for itself wasn't lost on Modelo. Angst about the partnership within Modelo's controlling families intensified during the first few years of the tie-up as Anheuser increased its ownership at prices that looked cheaper each time Modelo's performance beat expectations.

Using options that were set to expire at the end of 1997, Anheuser bought up chunks of Modelo until it owned just more than half the company—but not without a battle. In late 1996, three years into the agreement, Anheuser announced that it planned to pay $550 million to more than double its stake to 37 percent. A dispute over the purchase price stalled the deal, however, and Anheuser warned its investors that if the two parties couldn't reach an agreement, the issue might tumble into arbitration. Three months later, Anheuser finally made its purchase—but at a cost of $605 million, a 10 percent increase over its initial plan. It then paid another $550 million the following month to buy its remaining 13.25 percent stake, bringing its total ownership to 50.2 percent. Through all three transactions, the amount of cash Anheuser sunk into Modelo totaled $1.63 billion.

From a financial standpoint, the investment proved lucrative and critically important for Anheuser-Busch. Without the profits it reaped from Modelo, it would have endured even harsher rebukes from Wall Street analysts and investors as its own business in the United States slowed. A variety of terms in the agreement stacked up in favor of Modelo, though, and provided some reassurance to its controlling families even after Anheuser-Busch seized majority ownership.

The most valuable cards in Modelo's hand involved control. The original deal with Anheuser gave Modelo sole decision-making capability, not only over how its operations were run but also over the amount of money it paid out in cash dividends each year. Those dividends went straight to Modelo's controlling families and to the company's other shareholders, including Anheuser-Busch.

“There were theoretical hooks in the agreement, but the reality is that Modelo had the biggest hook,” said one person close to Modelo. “It was entirely under Modelo's control how much cash stayed at Modelo or went out to the shareholders. And from Anheuser's perspective, the only thing they really cared about was the dividend because they had no control. Historically, there were a lot of disputes about that. Anheuser really couldn't control what Modelo was doing.”

A different problem drove Anheuser's beer wholesalers to the edge, however. U.S. distribution rights weren't included in the 1993 agreement—which meant that although Anheuser-Busch had invested heavily in the company, someone else imported Modelo's beers. Anheuser tried to win the rights to import Corona, but in 1996, Modelo tied itself for another 10 years to its original distribution partners in a move that looked suspiciously like an effort to swat Anheuser away. Modelo brushed Anheuser back yet again when those agreements expired, leaving Anheuser's distributors still competing against Modelo's beers in the United States rather than selling them. “That was a real point of contention with Mr. Busch in the 2000 decade,” said a former top executive at Anheuser-Busch. “How come we don't have rights to Modelo when it was a growing brand—how can we not have rights for all of our wholesalers?”

The Third, despite his intense powers of coercion, never found a way to shoehorn the Mexicans into submission.

“These guys were expecting to buy the company in the first years of our partnership, and they were doing everything they could to upset us,” said one person close to Modelo. That's one of the reasons the families that owned Modelo set up a controlling trust to manage their interests—to make it clear that they had no plans to sell. The Third and his team's rude and persistent entreaties angered Modelo's Mexican patriarchs.

“They were not going to sell their souls to us after the way we treated them,” a top Anheuser executive said. “He would just get livid, he would threaten, he would cajole, he would do everything he could to try to make them do it,” the executive said. “That's not the way you negotiate a deal.”

Money and control weren't the only thing that drove Anheuser-Busch and Modelo to the wrestling mats. The more time the two companies' executives and family members spent with each other over the years, the less it seemed they could stomach the personal interaction. Some executives in St. Louis felt Modelo wasn't trustworthy—that they didn't play by the same rules of business conduct Anheuser did. Modelo insiders, meanwhile, saw the Busches, and August III in particular, as patronizing and rude.

“August III they despised,” said Harry Schuhmacher. “He was just so arrogant.”

One particular tale that reared its head during the InBev takeover battle was legendary at both companies. In the early 1990s, when the two rivals were still negotiating their original deal, a group of Anheuser-Busch executives flew down with their spouses to Cabo San Lucas, a vacation spot on Mexico's Pacific Coast, for a weekend of deep-sea sport fishing. The group convened at the docks one morning with Modelo's top executives and their wives, packed what they needed into a couple of fishing boats, and motored off with their hired crews in search of marlin.

August III's boat hooked a good-sized fish not long after setting out, and Valentín Díez, a senior vice president of Modelo at the time, took the chair and began fighting to reel in the fish. More than an hour later, August III glanced over at Valentín, who was covered in sweat and still laboring behind the reel, and suggested that someone else should relieve him for a while. Then The Third's cell phone rang, and he turned away to answer the call, rejoining the group moments later to announce that he had to return to the United States for an urgent matter. Something clearly ranked higher on his list of priorities than the opportunity to bond out at sea with his potential Mexican business partners.

The Third's boat mates agreed to turn around and head in, but their captain wanted to hand off the rod—and the valuable marlin still attached to it—to another boat first.

“Out here?” The Third said quizzically. “No way. That's too dangerous with two boats out here in the open sea, rocking and rolling the way we are!” The boats were indeed caught in some sizable swells, and several of the women on August III's boat, including his wife, Ginny, had been struggling to keep their breakfast down since they first tossed in their fishing lines. The wife of Pablo Aramburuzabala, a key Modelo controlling shareholder, had been up on the bridge with the boat's captain for 40 minutes, lobbying half-jokingly for the group to cut its lines and turn back to dry land.

It quickly became clear that August III and the captain were threatening a standoff. The captain wasn't ready to give up on his marlin, nor was he thrilled about having his judgment overruled by a brusque, ice-eyed American while out at sea. It was safe to say that the captain hadn't met many men the likes of August III.

The Third turned to Purnell and quietly instructed him to take hold of the fishing rod and yank on it, hard. Purnell did as he was told, and the line predictably snapped, sending the marlin reeling into the depths with a shiny new hook embedded in its cheek. With no prize left to fight over, the captain angrily grabbed the steering wheel and pivoted his boat toward shore.

Once the group hit dry land, word quickly spread that The Third had rudely offended his counterparts at Modelo by forcing them to return early—and by making little effort to dispel the notion that he had more important things to do back home. According to Purnell, the truth was distorted. “They were not mad at us at all,” he said. “In fact, Pablo's wife was very happy with us, and Pablo was too. Everyone was kind of laughing at it.”

That wasn't how it came across to the Anheuser-Busch and Modelo executives who heard about the trip in the days that followed, however. And as time wore on, their beliefs about what happened mattered more than those held by the executives who were actually on the boat.

Relations between the two companies defrosted slightly after Carlos Fernández became CEO. After spending almost six months with Anheuser-Busch as part of a development program, he had returned to Mexico with a decent sense of what made Anheuser-Busch tick. He even built up a strong relationship with The Third, and with The Third's encouragement, he developed a straightforward relationship with August IV as well.

Fernández didn't particularly click, however, with various members of The Fourth's management team, and it was plainly obvious when the companies' takeover talks kicked off in 2008 that he and the rest of Modelo still harbored a general level of distaste for much of Anheuser-Busch's leadership.

Fernández and The Fourth represented an almost humorous exercise in contrasts. Carlos, who was two years younger than August IV, was a conservative, Catholic family man who had married the daughter of one of Modelo's elder statesmen and relished the time he spent with their five children. “One of the most obviously striking things is the difference in capacity between the Modelo son and the Anheuser son,” said one Modelo advisor. “They couldn't be more different in personality and temperament. Carlos goes home every night to his wife and their bazillion kids and is a happy, sound, measured guy.”