Heineken or the last of the Mohicans

Günter Heyden, the long-time CEO of Germany’s Krombacher Brewery in his highly rated doctoral dissertation on the German beer market * argues that family-capitalist companies may suffer from the disadvantage of slow growth as they do not want to give up management control when merging with another company, but enjoy the advantage that they are not bothered by having to do complex integrations, which could put their corporate culture at risk.

Whereas SABMiller and InBev were quick to move into high-risk markets (Russia, Africa, Latin America) and do deals which pushed them far ahead of their rivals, Heineken was a late-comer to high-growth Russia and Latin America. After eight years in Russia and a spate of acquisitions, Heineken’s market share is still only 13 percent (2009). As concerns Latin America, Heineken was the last to jump on the band-wagon. It is understood that Heineken could have entered Colombia years ago, but refrained from so doing because the Santo Domingo family wanted seats on Heineken’s board – a thought the Heineken family apparently abhorred.

Following the takeover of FEMSA Cerveza, the Heineken family will see its interest diluted in the brewer but will retain overall control. The family’s Charlene de Carvalho-Heineken, who inherited her father’s controlling stake in the company in 2002, has worked with the brewer’s executives to construct a complex deal to retain control and still expand into Mexico and Brazil.

FEMSA will receive shares in brewer Heineken NV and also in its controlling vehicle Heineken Holding to maintain the latter’s 50.005 percent stake in the brewer, but the family holding L’Arche Green NV will see its share in Heineken Holding diluted to 50 percent from over 58 percent previously.

The deal will see FEMSA end up with 12.5 percent of Heineken NV and 14.9 percent of Heineken Holding, representing a 20 percent economic interest in the total group. As part of the deal, J.A. Fernandez Carbajal and J.G. Astaburuaga

Sanjines will represent FEMSA’s interests on Heineken’s Supervisory Board.

The enterprise value of USD 7.6 billion puts FEMSA’s business at 11.2 times operating cash flow, in line with other emerging market beer deals, like SABMiller’s purchase of Bavaria in Colombia in 2005. Still, the publication says, the deal will not cover Heineken’s cost of capital for six years.

Moreover, the final price isn’t fixed. Heineken has to buy back 29 million shares over the next five years. They will be handed to FEMSA. If Heineken’s share price continues to rise, so will the cost of the acquisition, it was reported.

Given the financial market’s surprisingly positive response to the FEMSA deal, one begins to wonder if analysts have not decided to view Heineken’s recent acquisitions track through tinted glasses. Or has management literature been proven wrong that shows that the failure rate of most mergers and acquisitions lies somewhere between 40 percent and 80 percent?

Granted, the Heineken family has retained overall control. But does it still control the management? And, more importantly, has Heineken’s management always acted to the family’s best interests? When Heineken bought brewer S&N, it took on huge problems with the struggling Globe Pub Group, in fact Heineken had to throw good money after bad. Moreover, in India Heineken immediately had a costly fall out with its partner at UB Group. Also, what’s become of Heineken’s promises to grow S&N’s cider brand Strongbow? In 2009 it launched Strongbow in the Netherlands and announced it will introduce it in the USA and Canada. That’s two years after the purchase.

Now to the FEMSA deal in Brazil. Heineken has had a minority stake in Brazil’s Kaiser Brewery for years, which has been losing market share. Both its previous owners Molson and FEMSA have failed to turn the business around. What can Heineken do better now that it did not manage to achieve before, we ask?

These are just obvious points. More importantly, what have these deals and integrations meant to Heineken’s corporate culture which former employees continue to enthuse about?

Returning to Mr Heyden’s categories: Is Heineken still a family-capitalist company in the true sense or has it since become more like a manager-capitalist company where management acts in accordance with its own goals?

Time will tell.

* Günter Heyden, Strategisches Marketing im deutschen Biermarkt, Verlag

Dr. Kovac, Hamburg 2009