The article first appeared in the St. Louis Beacon, June 20, 2008 - When Anheuser-Busch's board met Friday to discuss a takeover bid by Belgian brewer InBev, any discussion about the company's future was conducted without the vote of Carlos Fernandez, chief executive of Mexico's Grupo Modelo.
He has been an Anheuser-Busch board member thanks to the agreement that gives the St. Louis company's 50.2 percent ownership of Grupo Modelo, the largest brewer in Mexico. But he quit Friday, prompting some analysts to speculate that the board may reject InBev's bid. The board has made no response to InBev; it says it is still reviewing the proposal.
"This is a sign that the A-B board is looking to oppose InBev," says Juli Niemann, executive vice president at the Clayton financial advisory firm Smith, Moore & Co.
Grupo Modelo issued a statement Friday, saying the resignation was made "to avoid the appearance of any conflicts." Fernandez's departure cut the Anheuser-Busch board to 13 members.
His resignation was reported in an Anheuser-Busch filing with the Securities and Exchange Commission that offered no explanation. "Carlos has always provided great value as a member of our board, with insights into the business," said August A. Busch IV, the Anheuser-Busch CEO in the SEC filing.
Grupo Modelo has emerged as a pivotal figure in the InBev bid for Anheuser-Busch. Some say the St. Louis company might try to buy the rest of the Mexican company, thus making Anheuser-Busch more expensive for InBev.
Assuming Grupo Modelo would agree to a buyout -- and there is no indication it would -- the cost of the InBev offer, originally worth $46.4 billion, could go up by $10 billion to $15 billion by some Wall Street estimates. (Anheuser-Busch paid $1.6 billion in several increments during the 1990s for its stake in Grupo Modelo.)
If InBev still coveted Anheuser-Busch at this price, it would have to borrow more money than the $40 billion that it plans to raise to finance its original deal.
Carlos Brito, the InBev CEO, has said the $65-a-share is a fair offer; and he has warned Anheuser-Busch against making a deal with Grupo Modelo to complicate InBev's offer.
Grupo Modelo appears to prefer the status quo. "Our goal is to continue to be a Mexican company that brews high quality beer in Mexico for markets all over the world," it said on June 13.
If Anheuser-Busch and InBev make a deal, "Grupo Modelo will make the necessary decisions in benefit of the company and its shareholders, based on the conditions of the contract that rules over our relationship with A-B," the Mexican company said.
Although Anheuser-Busch has nine of 19 seats on the Grupo Modelo's board, it has no control over the Mexican company's operations. Analysts remain divided over what their agreement allows in terms of buying out each other's shares.
Niemann doubts Grupo Modelo would accept an Anheuser-Busch buyout. "If InBev buys Anheuser-Busch, all Grupo Modelo would be doing is swapping partners," she says. InBev wouldn't gain operational control.
Grupo Modelo's controlling shareholders "are not interested in selling their shares, in our view," says a recent report by Celso Sanchez, a Latin America beverage analyst for Citigroup.
If Anheuser-Busch can't buy Grupo Modelo as a defense against InBev, it can employ other tactics such as creating a poison pill, Niemann says. This is a strategy used by management to fight hostile suitors.
The Anheuser-Busch board could approve a poison pill plan -- without needing immediate shareholder approval -- that could dilute a suitor's stock holdings if it acquired more than a certain percentage of the St. Louis company's shares.
Anheuser-Busch also could sell some assets, such as its theme parks or take on more debt. "They could probably find plenty of investment bankers willing to sign off" on such defense strategies, Niemann says.
COMPLEX RELATIONSHIP
The Fernandez resignation occurs at a time when some analysts describe the relationship between Grupo Modelo and Anheuser-Busch as something akin to smiling with clenched teeth.
"The relationship has improved over time," says Benj Steinman, editor of Beer Marketer's Insights, which conducts research and publishes reports about the U.S. beer industry.
"I do think fundamentally there are major differences," said Steinman in an interview before Fernandez quit the Anheuser-Busch board. "The public face [of the relationship] has improved."
Some analysts detect more friction. A recent report by Credit Suisse referred to a "cold shoulder relationship" between the two companies. As for Anheuser-Busch acquiring the rest of Grupo Modelo, analyst Tufic Salem asked clients: "Will A-B achieve [in a buyout] what 15 years of partnership could not do?"
Credit Suisse has a neutral rating on Grupo Modelo, whose stock is traded on the Mexican exchange. The firm has had investment banking relationships with all three companies in the past 12 months. The analyst doesn't own shares.
The discussion of Grupo Modelo's role in the takeover battle also illustrates that Anheuser-Busch needs the Mexican company more than vice versa.
"Anheuser-Busch has become highly dependent on the equity income," said Ann Gilpin, an analyst for the independent research firm Morningstar, in an interview before Fernandez resigned. She is referring to the way Anheuser-Busch's stake in Grupo Modelo is counted in the St. Louis company's financial reports.
Anheuser-Busch gets a dividend from Grupo Modelo. Last year, it received $403 million vs. $240 million in 2006 and $204 million in 2005. Anheuser-Busch also gets equity income from its relationship with China's Tsingtao Brewery for which its owns a 27 percent stake.
Equity income from investments in foreign companies "has grown faster than domestic profits," adds Steinman of Beer Marketer's Insights. "It is the principal driver of Anheuser-Busch's earnings."
Robert W. Steyer, a freelance journalist living in New York, was a business reporter for the St. Louis Post-Dispatch.