As
corporate ceremonies go, it was a major event. The occasion? The
opening in January of a new corporate headquarters for InBev in Leuven,
Belgium. Prime Minister Guy Verhofstadt was there, clanking beer
glasses with Leuven Mayor Louis Tobback and InBev's top brass,
surrounded by various ambassadors and dozens of other dignitaries. The
guests had come to the Flemish university town about 20 miles east of
Brussels to celebrate not just InBev's handsome brick building, but
what it represented: the recent coronation of InBev as the global king
of beer, by volume, if not by sales. In a speech that alternated among
French, Dutch and English, Tobback reached for some historical
perspective. When InBev's corporate ancestor, Den Horen, was brewing in
Leuven in 1366, he noted, half of the earth's surface was still
undiscovered. "Today," he said, "we have to ask ourselves if there is
someone drinking beer on Titan."
The reference to the European Space Agency's visit to Saturn's moon
was apt. Like the Huygens space probe, InBev has traveled a vast
distance in a fairly short time. The company took its modern shape only
in 1987, when, looking ahead to a globally consolidating industry,
Belgium's No. 1 brewer, Piedboeuf, merged with its No. 2, Artois, to
form Interbrew. Under that name the company embarked on a long string
of acquisitions around the globe, targeting Eastern Europe first, but
going on to make deals in the U.K., Germany, Russia, China, Canada and
the U.S., among other places. Last year came the breakthrough
transaction: the complex, €22.4 billion ($29.3 billion) combination
with Brazil's Companhia de Bebidas das Américas, better known as AmBev,
which gave the company its new name, new logo and industry-leading 13%
market share by volume. InBev hadn't sought this deal, but certainly
welcomed it. "To be a midsized player is a sure recipe for failure.
Once you've embarked on the path of becoming a leader, there's almost
no way back," says Gauthier de Biolley, InBev's senior vice president
for external growth. "You need to be consistent."
Consistent doesn't mean perfect. Along the way, InBev has run up
against disputes with minority shareholders of several targets;
criticism about overpaying on deals, especially before CEO John Brock
succeeded Hugo Powell in 2003; conditions imposed by competition
authorities, most notably in 2001, when U.K. regulators ordered
Interbrew to sell Bass' flagship Carling brand; and, in February, an
unusual retreat from Slovenia after losing out to local interests in a
battle for Pivovarna Union. There's also plenty of work ahead as InBev,
which ranks No. 2 in global sales, tries to boost its profitability.
"Our aim is not to be the biggest," Brock said in January. "It is to be
the best."
But just having a shot at being the best is no small feat,
considering where InBev is coming from. Interbrew was 17th in sales as
recently as 1992. Today, thanks to its many deals, InBev has some
impressive pieces in place in the developed world and a strong presence
in the world's fastest-growing markets - "the best geographic balance
of any international brewer," according to a November 2004 Deutsche
Bank report. The strategy combines more than 200 local brands (from
Canada's Alexander Keith's to China's Zhujiang) with global specialty
brands (such as Hoegaarden and Leffe), so-called multicountry brands
(Bass and Staropramen), and three global flagship brands (Stella
Artois, Beck's and Brahma, an AmBev brew for which the company has big
plans). InBev now operates in 32 countries, sells beer in 140 and is
No. 1 or No. 2 in 20 key markets. It's too soon to say how suitable the
unusual structure the company developed to accomplish all this will
prove for the tasks ahead. But InBev already offers a striking example
of how one of the oldest players in one of the world's oldest
industries has taken up modern tools to compete in an age of
globalization.
InBev's impetus to expand comes largely from the ambitious clans who
formed and still control it - the de Spoelberchs, de Prets, Van Dammes
and de Mevius', who are among Belgium's richest families. The company
went public in 2000 and trades on the Euronext stock exchange, with 26%
of its shares in free float as of August. The precise size of the
family stakes is unclear. What is clear is that family members are
actively involved and have four seats on the 14-member board of
directors, nominated by EPS SCA, a Luxembourg company representing
their interests. AmBev's founders also control four seats, with the
remaining six held by independent board members including former
Belgian prime minister Jean-Luc Dehaene.
"Normally family shareholders care a lot about defending strong cash
flows already generated and not taking too many risks. At InBev it's
quite different," says Thijs Berkelder, an analyst at Petercam in
Brussels. "The families involved just want to be the largest global
brewer. If they want something and they see the long-term potential, I
think they will pay the price." Allan Chapin, a board member and
adviser, points out that having the family members on the board also
means quick feedback during deal talks. "It gives you the ability to
get a quick sense of what the shareholders think. That is a major
strategic advantage," says Chapin, a partner at Compass Advisers LLP in
New York. The brewer's recent campaign to buy out its partners in the
Sun Interbrew Ltd. Russian joint venture, a deal on which Chapin
advised, supports both points: The company paid a full price for a
choice asset in a high-growth market, and got the deal done quickly.
But if the ambition traces back to the families, strategy and
execution are very much in the hands of the management team led by
Brock, a 56-year-old, Mississippi-born former chief operating officer
of British confectionary and beverage giant Cadbury Schweppes plc, who
took over as CEO of Interbrew in February 2003. Brock, in turn, relies
heavily on de Biolley and a global, 10-member M&A team working out
of Leuven, Hong Kong and São Paulo (see box).
De Biolley, 44, is an economics and law graduate from the Catholic
University of Leuven, a town that has been bringing students and beer
together for centuries. Before joining Interbrew in 2000, he was vice
president of international development for Paris-based Vivendi
Universal Group SA's water and energy divisions, leading deals in the
U.S., Brazil, Thailand, South Korea, China and throughout Western
Europe. At InBev he has co-led the AmBev deal, led Interbrew's
development in Germany and, most recently, InBev's buyout of its
partners in Sun Interbrew.
De Biolley's predecessor, Stéfan Descheemaeker, led many earlier
deals, including the 1999 acquisition of Bass, which, coming on the
heels of the company's purchase of Whitbread, was rejected by the
British Trade and Industry Secretary five months after it closed. The
reasoning: since the deal would have raised Interbrew's share of the
U.K. beer market to 32%, it would have created a duopoly with Scottish
& Newcastle plc. Initially the regulators demanded the sale of all
of Bass. But a favorable court ruling set the stage for a compromise -
the sale of the Carling brand.
Named zone president of Central and Eastern Europe in January 2004,
Descheemaeker is still very much involved in M&A as a member of the
executive management board. Like de Biolley, he says having the M&A
chief report directly to chief executive Brock is a huge plus. "M&A
must remain a very streamlined process because it sometimes requires
on-the-spot decisions," Descheemaeker says.
| A bevy of brands |
| InBev's
strategy is to produce hundreds of local brews around the world, while
also promoting a trio of global flagship brands: Stella Artois, Beck's
and Brahma |
| Skol (Brazil) |
19% |
| Brahma |
14 |
| Stella Artois |
6 |
| Beck's |
4 |
| Leffe/Hoegaarden |
1 |
| Others |
56 |
| |
| Beer's big three |
|
Company |
Projected 2004 volume
(millions of hectoliters) |
| InBev |
140 |
| SABMiller |
130 |
| Anheuser-Busch |
127 |
| |
|
Company |
2003 sales ($mill.) |
| Anheuser-Busch |
$14,147 |
| SABMiller |
12,645 |
| InBev |
10,505* |
| |
|
Company |
2003 operating profit ($mill.) |
| Anheuser-Busch |
$3,199 |
| SABMiller |
1,950 |
| InBev |
1,632* |
*pro forma combination of Interbrew and AmBev results
Source: Canadean |
Moving quickly is important in an industry that's
consolidating as rapidly as InBev's is. The main action consists of the
giants snapping up brands and capacity in emerging markets to offset
flat markets in Western Europe and the U.S. - though, as SAB plc's
purchase of U.S.-based Miller Brewing Co. for $5.6 billion in 2002
showed, globalization can be a two-way street. The hot spots are China
and Russia, with about 6% and 5% annual growth rates, respectively.
Growth in Russia may be slowed by new restrictions on public drinking,
but it's still likely to far outpace annual global growth of 1.5% to
2%. So is growth in Latin America - one of the main reasons why AmBev,
which has a 65% market share in Brazil and leadership positions in much
of the continent - was so attractive.
What's driving consolidation? Basically, economies of scale in
everything from ingredients to marketing in an industry that even today
is far more fragmented than, say, soft drinks. Brewers are doing deals
for two basic reasons, explains Kevin Baker, head of alcoholic
beverages at U.K. drinks consultancy Canadean: "The ability to
rationalize operations, where you're acquiring in a market or region
where you already are operating; and to get greater access to other
markets that you're not already in."
InBev's strategy of overlaying hundreds of local brews with three
global brands puts it somewhere between St. Louis-based Anheuser-Busch
and Dutch brewer Heineken NV, on the one hand, and SABMiller plc of
London on the other. The first two companies concentrate almost
exclusively on their global flagship brands, while the latter focuses
only on local brands.
The differing strategies still leave room for competition over
choice deals. Under Brock, though, InBev has gotten a bit more
conservative when bidding. InBev has recently shied away from
properties it considered too expensive, such as Brau Beiligungs Union
AG, Austria's No. 1 brewer, and China's Harbin Brewery Group Ltd. Last
year, Heineken snapped up BBAG for €2.1 billion including debt, while
Anheuser-Busch won a bidding war with SABMiller for the latter with a
$720 million offer.
Figures from Canadean show that InBev has two of the world's 10
largest brands by volume - though its top-selling brand, Brazil's Skol,
the world's No. 3 brand overall in terms of volume, still has a long
way to go to catch up with Anheuser-Busch's Budweiser and Bud Light,
global No. 1 and No. 2, respectively. Excluding domestic sales,
Canadean ranks Stella the world's seventh-largest international brand
by volume (though InBev's own figures put Stella at No. 5) and Beck's
the global No. 10.
Future prospects for Brahma, the world's eighth-largest brand, as a
third global flagship behind Beck's and Stella Artois was another big
reason Interbrew wanted AmBev, which before the deal was the world's
fifth-largest brewer. InBev says consumer research conducted in various
countries confirms that the Brahma brand and its Brazilian aura are
highly exportable. At the same time, the AmBev deal should pave the way
for further expansion of Beck's and Stella, with the latter recently
launched in Argentina.
The company says it will unveil plans for rolling out Brahma in the
U.S., Canada and Europe in the coming months. Some warn that any
attempt to make Brahma the next Corona in the highly competitive U.S.
market will be a major gamble. Corona, brewed by Grupo Modelo, Mexico's
largest brewer, has a prominent place in American refrigerators -
thanks in part to the fact that Anheuser-Busch directly and indirectly
owns approximately 50% of Modelo. "They're going to have to put a lot
of marketing behind Brahma to make it a success," says Marc Leemans,
analyst with Belgian bank Degroof.
But that's never stopped InBev before. Within two years of acquiring
Brauerei Beck & Co. in 2001, it increased production of Beck's by
half a million hectolitres, to 5 million. It has also had huge success
with Beck's Gold, a brand it introduced in February 2003 and marketed
as "refreshing, lively and mild" in transparent, ultraviolet-protected
bottles. The company continued to build up its position in Germany with
the 2003 purchases of Hasseröder Brauerei AG and Spaten-Franziskaner
Bräu AG, and in 2003 was Germany's second largest brewer, with brands
in all segments. "Together with Hasseröder and most recently
Franziskaner, [Beck's] has enabled us to build a portfolio of
must-stock brands, and from a national perspective Beck's and
Franziskaner are in that category," boasts de Biolley.
Initially InBev had been criticized for overpaying on Beck's, an
acquisition that cost about 13 times earnings, but the company argues
that in light of its development strategy and follow-up transactions,
the Beck's deal has proven to make excellent strategic and financial
sense. In addition, InBev - now the second-largest brewer in Germany -
plans to keep the country on its radar screen for future possibilities.
Though the German market is shrinking, it remains notoriously
fragmented, with large possibilities for consolidation.
The combination of Interbrew and AmBev - which InBev insists is
neither an acquisition nor a merger - came to fruition in August, after
the companies overcame numerous legal obstacles. AmBev, the world's
fifth-largest brewer and Latin America's No. 1, was formed by the 1999
merger between Cia. Cervejaria Brahma and Cia. Cervejaria Antarctica.
The company's founders - Jorge Paulo Lemann and Carlos Alberto de Veiga
Sicupira - were investment bankers in the 1970s at Brazil's Banco
Garantia, which Credit Suisse First Boston bought in 1998. They both
have seats on InBev's board, along with fellow AmBev executives Roberto
Moses Thompson Motta and Marcel Hermann Telles, co-chairman of AmBev's
board since 2000.
The multistep Interbrew-AmBev combination called for AmBev's
controlling shareholders to trade their 53% stake in the Brazilian
brewer for about 25% of InBev. But first, Brazilian regulators had to
clear the transfer of Interbrew's Canadian subsidiary Labatt Brewing
Co. to AmBev in exchange for AmBev shares and assumed debt valued at
€5.8 billion. Brazil's largest pension fund, Previ, an owner of 14.7%
of AmBev's preferred shares, had claimed the deal valued Labatt too
highly, but in August Brazilian regulators ruled that the deal would
not be detrimental to minority shareholders or justify an inquiry. Ten
days later, the companies announced the creation of InBev, but there
remained another snag to remove. On Aug. 31, InBev announced that it
and Mexico's Fomento Economico Mexicano SA de CV (Femsa) had unwound
their U.S. and Mexican cross-shareholdings, a move initiated by Femsa.
InBev has, without a doubt, an unusual structure. For one thing,
both of the companies are retaining their separate stock exchange
listings. But whatever name the arrangement goes by, it does hew to a
long-established Interbrew practice: making the most of the management
talent its deals bring aboard. "With InBev, you have a truly global
management composed of the best people of the old Interbrew and the old
AmBev," says Descheemaeker. Interbrew, known for the kind of
international marketing and brand-management prowess that has made
Stella Artois a hit in the U.K., is hoping that AmBev's strict
financial discipline - reflected in a 35% Ebitda in 2003, lofty even by
emerging-market standards - will prove transferable. Brock thinks the
deal can pave the way for InBev to achieve a 30% Ebitda by 2007. Says
de Biolley: "If you put these two cultures together, I don't think
anybody would doubt that it's basically giving you all you need. The
challenge, as we see it, is to make it blend in a harmonious way."
Investors, initially put off by the complexity, have warmed to the
deal. Between the close of the transaction on Aug. 27, 2004, and the
close of trading on Feb. 22, InBev's share price has risen about 12%.
One big factor: AmBev's continued strong performance, which is expected
to help produce strong 2004 results for InBev when the figures are
released in early March. It doesn't hurt that the Brazilian economy is
growing well. In February, J.P. Morgan increased its earnings-per-share
forecasts for InBev for 2004, 2005 and 2006 by 7%, 10% and 13%,
respectively, citing a stronger than expected contribution from AmBev.
Is there another huge deal in InBev's future? Executives won't rule
anything out, but de Biolley indicates that the emphasis at present is
on integration and targeted transactions. "We want to keep it to what
it is and where we can add value," he says. Russia, China and Germany
are currently the bright points on the radar screen. Of course, if
there do turn out to be beer drinkers on Titan, he can always add that
to the list. - Renee Cordes
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Juergen Lasowski
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