Dethroning the King (34 page)

The value Anheuser-Busch was willing to assign to Modelo, which soon settled at $15.2 billion, wasn't uncovered on Wall Street during the companies' talks. Had it been, it would have surely prompted jaws to drop—and could have sparked enough outrage from Anheuser-Busch shareholders to nullify the negotiations before they progressed any further.

“They came up with a rather large price to pay for Modelo,” one Anheuser-Busch advisor put it bluntly. “It was a huge fricking price.”

Modelo's controlling families had wads of cash, however. That wasn't their primary concern. It was a different point in Santel's presentation that day that really perked up Fernández's ears.

“You, Carlos, would be CEO,” he told Fernández.

Fernández leaned in to make sure he was understanding things correctly.

Carlos, Santel explained as he continued, could be put in charge of all of Anheuser-Busch Modelo—both companies combined—if he was willing to go through with the deal, while The Fourth would shift into a more ceremonial role with less power over day-to-day operations. That meant Fernández could steer the company in whichever direction he and the other Modelo family members chose.

It also meant that August IV was willing to hand Anheuser-Busch over to the Mexicans—at significant expense—in order to evade the Brazilians. Such a risky move was likely to spark a war among Anheuser-Busch investors over the right course of action. InBev's offer was already on the table, and its financing was coming together more tightly each day. A deal to combine Anheuser-Busch and Modelo could preserve Anheuser's “independence,” at least optically. It would have to go off without a hitch to boost Anheuser's value to the point where it met investors' expectations.

August IV's offer to cede control was an effort to address those concerns. He wasn't likely to convince dubious shareholders that he was the right person to perform such a monumental task. He didn't have much operational experience, and he had none whatsoever in executing a merger. If shareholders knew that Fernández was going to be in charge, they might be willing to stick around.

Fernández was dubious. “What do you think about that, personally?” he asked Santel, who had sat on Modelo's board for more than a decade and knew the two companies' relationship well. “And what about the other members of the strategy committee?”

“Everyone enjoys working with you,” Santel reassured him. “They'd be happy to.” And he meant it. “God, he'd be a great boss to have,” one strategy committee member said later, summarizing his thinking at the time. “He'd make us look like a multinational company, with August still there as a titular head.”

The two companies' bankers and lawyers were briefed on the meeting within hours of Santel's departure from Mexico City, and The Fourth called Fernández soon afterward to confirm that he supported the terms that had been outlined. “I'm more than happy to work with you on the future of Anheuser-Busch,” The Fourth said.

Months later, however, interpretations differed as to exactly when August IV and his team first agreed to let Carlos be chief executive—and whether Carlos pushed for it himself as a condition for starting talks.

“It was absolutely clear that Carlos was going to be the CEO and run the business” from the very first meeting, one of Modelo's advisors said. “So from Carlos's perspective, that actually had some appeal.”

“Carlos would have never gone to his board and everybody else if that wasn't on the table,” another Modelo advisor said.

People on Anheuser-Busch's side of the fence saw things a bit less clearly. While August IV and Santel may have suggested that Carlos could be CEO or co-CEO during the early stages of the companies' talks, they say, The Fourth never explicitly admitted that his team made the offer right from the start.

“No one would admit they had promised him the job,” said one of Anheuser-Busch's advisors. “I bet he was promised the job. But no one will own up to having guaranteed him on day one that he would have that job.”

“I'm not aware, and I don't believe that it happened, that August would have offered him that,” said Sandy Warner. “There was no commitment at that moment. There was never any commitment to Carlos.”

Even Santel wasn't able to clear up which promises were made to Carlos.

“I think there was some confusion there,” he said. “I recall there was confusion on who said what to whom.”

“We were certainly willing for him to run the whole international show. That was one of my jobs, but I'd be happy to have him do it, too.”

Regardless of when the suggestion was made and how firm a commitment it represented, there was no question that Carlos's reputation exceeded The Fourth's when it came to operating a beer business. If the two executives had been pitted against each other and asked to whip up an inventive marketing campaign, The Fourth would have had a big edge, but Carlos was viewed as one of the better operators in the beer industry, even by executives within Anheuser-Busch.

“If you look at Modelo, it basically grew market share and was a tightly run company with very low expenses,” said a person close to Modelo. “And that was all Carlos.” If Anheuser-Busch was considered the U.S. beer market's “category killer” in 2008 with a 48.5 percent share of the market, Modelo warranted a different term entirely. By the end of that year, it controlled 63 percent of the Mexican market for domestic and exported beers.

Handing control to Fernández seemed like the responsible thing to do, and it looked like the best way to enlist the full support of the Modelo families. It could also be a way for August IV to escape the rigid, stifling box in which he had been suffocating since taking his current job. If either he or Anheuser's board had doubts about his leadership abilities now that he was 18 months into the gig, this was their chance to hand his crown to Fernández under the auspices of the deal. The Fourth would never have to admit he wasn't cut out for the position.

“When the card got played for Carlos to be CEO . . . and August to have a ceremonial role, at that stage in the game it was pretty smart because August was probably like, ‘I'm done, I can't take it anymore,'” said a former Anheuser-Busch executive.

“I sense that he had . . . some feeling of kinship and responsibility to the other managers and employees,” said one advisor to the company. “With just getting out of the limelight or stepping aside, it wouldn't have been that the company was lost on his watch, and it wouldn't have been that the people who mattered to him—the employees and managers—were toast. That was a much better result than InBev, even if he was not going to be CEO under either circumstance.”

“It really created a much better company,” said a person close to Modelo. “And Augie [IV] was a disgustingly awful CEO, so it actually was better.”

To put less of a strain on its finances, Anheuser wanted to use its own stock to pay for as much of Modelo as possible. Companies that sell themselves are often turned off by the notion of accepting stock as payment, but under the structure Anheuser-Busch was proposing, the Modelo families could end up owning about 15 percent of the company—four times more shares than the Busch family did. That would make them the most powerful group of Anheuser-Busch shareholders by far, and they'd be controlling an even bigger company.

The proposition of owning the single largest stake in the company, combined with the notion that Carlos would be in charge, helped Modelo come around pretty quickly to the idea of accepting stock as currency. With Carlos at the helm, the value of their shares would depend on his leadership, not on August IV's. It was a much more palatable concept.

Santel's proposal in Mexico City was just an early-stage foray. Carlos and María knew it could take weeks of negotiations to strike up an actual deal. The tone his visit had set was unmistakable, though. Anheuser-Busch looked desperate—at least, that's how The Fourth's team had telegraphed it by making such a generous proposal right up front. They were offering Modelo the moon, not just by handing away control of the company but by proposing to pay a huge price to do so. It seemed backward, frankly. During merger negotiations, companies tend to lobby hard to either win control or to pay a lower purchase price, not to sacrifice control and pay extra to boot. The offer sounded too good to be true.

Kindler and Cravath lawyer David Mercado thought as much. Modelo was willing to kick off formal talks based on what Fernández heard from Santel that day. As the company sprang into action, the two advisors issued their first of many warnings.

“This is all very interesting, but you'd better stay close to InBev,” Kindler cautioned. “You're just a 'stalking horse'”—an option used by a takeover target to lure higher offers from other parties. If that were true, Modelo could get dumped by Anheuser-Busch at the 11th hour and be stuck with InBev as its new half-owner. Given the history between the U.S. and Mexican brewers, such a move was certainly not out of the question. “The Mexicans had chips on their shoulders—they were waiting to be insulted,” said one Modelo advisor.

Even if Anheuser-Busch was truly intent on a deal, the sheer concept that its board of directors would ultimately agree to hand the CEO's spot to Fernández still seemed shocking.

“I could not see the Anheuser-Busch company merging with Modelo and allowing a Mexican national to become CEO of the American gem,” said one of Modelo's advisors. “I couldn't see it. I became a believer as people kept telling me, but on our initial briefs, we were like, ‘Okay ...'”

To protect itself in case Anheuser-Busch planned to use it as a pawn, Modelo knew that it needed to get cozy with InBev, too. The Mexican brewer had to look out for its own interests first, and it needed to try to preserve its rights in case InBev took over. That could require some rough negotiating tactics. If Fernández and his team agreed to turn their backs on Anheuser-Busch and supported InBev's bid, they would undoubtedly improve InBev's chances of success. And they might be able to win more freedom from InBev in exchange. They could use the threat of such a move as leverage against both sides.

InBev's Marcel Telles had actually reached out to Fernández, whom he had known for some time, just a few days after InBev first offered to buy Anheuser-Busch. Fernández was at home with his family when Telles called, but he stepped aside for a few moments to listen to what Telles had to say. InBev had great plans in store for Anheuser-Busch, Telles professed, and it wanted to build a strong partnership with Modelo. A few weeks later, the two men met at Cravath's law offices in midtown New York to discuss their companies' structures and family traditions.

Cravath's Mercado had a long history with InBev. He was a Texas-born, fluent Spanish speaker who specialized in Latin American deals and had worked closely with the Brazilians in the past—including on the 2004 deal to merge AmBev with Interbrew. Kindler and Mercado had come to know and trust each other long before that deal, which happened roughly around the time the more senior Kindler left Cravath for his first job in banking, as global head of mergers and acquisitions for J.P. Morgan. Kindler wasn't the only lawyer on Wall Street who had jumped ship for the banking side of the M&A business, with its splashier headlines and bigger pay packages. As the Modelo situation was proving, he still had plenty of chances to work with his old colleagues.

He and Mercado pulled in another one of their frequent collaborators—public relations maven Joele Frank—to advise Modelo on strategy and media tactics once things got rolling in mid-June. Modelo realized that things could get sticky if a deal with Anheuser-Busch neared the finish line. There would be countless investors to appease and dozens of reporters to lobby—not to mention the very families that controlled Modelo, who needed to be corralled for critical discussions and votes. A few members of Congress were bound to take note and start asking questions if the Mexicans took control in St. Louis. And if talks fell apart, Modelo was going to need a bulldog to press its case behind the scenes and keep the media on its side. While the documentation that lay behind it looked somewhat shaky, Modelo believed its original agreement with Anheuser gave it the right to veto a takeover of the company. At the very least, Modelo thought it could forcefully adopt that stance and become a burr in InBev's saddle, making life in Brussels painful until InBev agreed to some sort of compromise.

Mercado and Kindler had known the boisterous Frank for decades and had worked with her on plenty of deals—Mercado had even been staffed, as an associate just five years out of Yale Law School, on Frank's first-ever transaction: an $820 million hostile bid in 1989 by Vitro, the Mexican glass maker, to buy Florida-based Anchor Glass Container Corporation. Vitro spent 66 days battling to subsume Anchor Glass, whose biggest customer, interestingly enough, was Anheuser-Busch.