The legacy of Brazil’s capitalists Lemann, Telles and Sicupira
In her recent book "Sonho Grande" (Big Dream), the Brazilian journalist Cristiane Correa tells the story of entrepreneur Jorge Paulo Lemann, 73, and his two faithful marshals Carlos Alberto "Beto" Sicupira, 65, and Marcel Telles, 63. In little more than four decades, the trio built one of the biggest business empires in the history of Brazilian capitalism and rose to prominence among global investors. Today they are the co-owners of AB-InBev (23 percent of shares), of the fast food chain Burger King and food company Heinz. Together, the three have accumulated a fortune estimated at USD 35 billion, while Mr Lemann himself is often said to be the richest man in Brazil.
From the brokerage firm Garantia in 1971, Mr Lemann set out to create an investment bank of the same name that would become the largest in Brazil. The rest of the story seems to lie in acquisitions: first Lojas Americanas, a major retailer in 1982. In 1989 they bought the brewer Brahma, the largest in Brazil. In 1999 they merged it with rival Antarctica, forming AmBev, which in 2004 they combined with Belgium’s Interbrew to become InBev, only to change its name yet again when in 2008 they took over Anheuser-Busch.
Although the three gentlemen would not collaborate with Ms Correa on her book, the result is still nothing less than a hagiography. The reason probably lies in Ms Correa’s particular Brazilian (read antipodean) perspective. She outlines how three Brazilian "PSDs" (Poor, Smart, Deep Desire to Get Rich) rose from ashes to riches and beat the Yankies at their own game: making loads of money by picking up one American icon after another: Anheuser-Busch in 2008, Burger King in 2010 and most recently Heinz (2013).
Ms Correa opens her book with an account of the Anheuser-Busch takeover, which she basically takes from Julie MacIntosh’s brilliant "Dethroning the King" (2011). To make her point, Ms Correa contrasts Anheuser-Busch’s lavish ways of treating its managers (they fly private planes and stay at 5 star hotels) with InBev’s parsimoniousness (economy class and 3 star hotels). In her narrative, August Busch IV, the CEO of Anheuser-Busch, is an ex-playboy who hardly shows up at the office, while his counterpart Carlos Brito, one of Mr Lemann’s faithful lieutenants, is an immensely private, hard-working father of four.
The chapter on the takeover of Anheuser-Busch sets the tone for the whole tome. Her account of the Brazilians’ rise is not so much imbued with anti-American schadenfreude as with moralistic undertones. In her view, the Brazilians Lemann, Telles and Sicupira do not just make better capitalists than the Americans, they make more caring and sharing capitalists and surpass the Americans at something they thought they were the best in class, namely the management of big companies, even global ones.
This in itself would be remarkable as Messrs Lemann, Telles and Sicupira stem from Brazil, which used to be notorious for its Samba ways of doing business. However, Ms Correa drives home the message that the trio made tons of money for themselves and likeminded employees, whom they awarded shares in their companies, because they adhered to their own management principles, which include meritocracy (hitherto unheard of in Brazilian society), relentless cost control, unforgiving hard work and a dose of pressure that not everyone can withstand.
To all appearances, Mr Lemann did not re-invent the wheel when he devised these principles. He learnt from the best, says Ms Correa, having being inspired by bankers like Goldman Sachs and the ultra-frugal Sam Walton, the founder of retailer Walmart. Mr Telles and Mr Sicupira, who were hired by Garantia, are the best examples of this management culture. Both entered the bank very young and rose to the top to become partners with Mr Lemann. If their decades-long partnership has worked well it’s because their responsibilities have always been clearly defined. Mr Telles and Mr Sicupira are the tough, hands-on, operational guys, while Mr Lemann takes care of the grander global picture, or as Mr Telles once reportedly said, he and Sicupira play the role of "radical bishops" and Lemann that of "Pope".
In the 1980s, the bankers bought the retailer Lojas Americanas and the brewer Brahma. In these companies, their obsession with cost control and the aversion to rigid hierarchies became clear for all to see. The walls of the executives’ offices were torn down to provide all with the same spartan environment. Restaurants for the top echelon were closed and preferential parking abolished. Whoever arrived first, regardless of position, could pick the best places. Both at Garantia bank and in the companies in which they invested, internal competition was encouraged and not all employees could stand the pressure. Ms Correa’s book includes testimonials from people who could not work for more than one week at Garantia.
"Sonho Grande" retells the trio’s big successful deals but also their missteps. The biggest blow to Mr Lemann’s career – the sale of the Garantia bank in 1998 to Credit Suisse – is narrated in detail. In mid-1997, at the height of the Asian currency crisis, Garantia was hit hard by the capital flight from emerging countries, but was slow in understanding the extent of the damage and failed to retreat on time. According to Ms Correa, the bank entered 1998 bleeding and in May was sold to Credit Suisse bank for only USD 800 million.
For a group of entrepreneurs, who are allegedly very much concerned about ensuring the longevity of their business, to dispose of Garantia must have been a tremendous failure. Nevertheless, as Ms Correa argues, the change in the global economy was not the main reason for the sale of the institution. "Garantia disappeared because it was dazzled by its success. Because its main partners had withdrawn from the business, the boat was without a pilot. Moreover, the new generation on board was more interested in fattening their personal assets than in perpetuating the institution," says Ms Correa.
Ms Correa may be right in her assessment of the situation. But what about the implications? Isn’t the failure of Garantia because of bankers’ greed proof that Mr Lemann’s much hyped meritocratic management system is not exactly crisis-proof? Unfortunately, that’s a question Ms Correa fails to ask herself.
Also, like any investor, the trio isn’t above making a quick buck for themselves – despite their claims to take a long-term interest in a company. For this, they use a tactic made notorious by U.S. funds in the 1980s. When buying a company, they put in some of their own money and borrow the rest and then use the acquired company’s cash to pay the debt. Burger King’s case is an example. Rather than put up the USD 4 billion purchase price for the number two burger chain, the Brazilians, through their 3G investment vehicle, only paid USD 1.2 billion out of their own pockets in 2010 and raised the rest through banks, which then got converted into the company’s debt. They next took the company private and began a severe cost-cutting programme which left many franchisees gasping for air. 18 months later Burger King returned to the stock market after its owners sold a 29 percent stake in the company for USD 1.4 billion, although Mr Lemann’s New York-based investment firm 3G Capital remains the company’s major shareholder with a 71 percent stake.
The "New York Times" newspaper opined at the time that "Burger King has long been an enrichment scheme for clever financiers, who have sucked hundreds of millions of dollars out of it over the years. Financial engineering has been part of the Burger King story for so long that it’s hard to believe there is still anything worth plucking from its carcass." What has 3G done? The New York Times said that it has prettied up the pig by laying off a large percentage of the staff in Burger King’s Miami headquarters. Burger King’s owners grew earnings by cutting expenses. In fact, they have not improved the business one iota. And, of course, 3G pulled out fees and dividends, too. In all, the newspaper concluded, private equity firms have taken for themselves USD 1.0 billion or more in capital that could have been used to improve the company’s relative standing versus its competitors, many of whom Burger King struggles to keep up with.
Any word on that in Ms Correa’s book? Nope.
A similar outcome may lie in store for the food company Heinz, where 3G has invested USD 4 billion and raised another USD 5 billion in debt earlier this year.
Having ploughed through the book’s 200 odd pages, I still fail to understand what’s so special about the trio’s version of Brazilian capitalism. True, they did not rely on government for subsidies and support like many other Brazilian companies. But that has not stopped them from bending the rules to their advantage, when needed. Take Brahma. They turned the brewer Brahma around by investing heavily in technology to raise productivity and realised early on that if they were to benefit from economies of scale they had to engage in mergers and acquisitions. Brahma’s external expansion began in 1994 when they acquired a brewery in Venezuela and built one in Argentina. Yet, following the sharp devaluation of the Brazilian currency in 1998, their international expansion was halted and they had to turn to a domestic partner that would make it financially strong enough to face the challenges of international competition. That’s when they merged Brahma with Antarctica, a deal that surprised many in 1999 because the Brazilian government approved of this union. Defying all rules to encourage competition, the government in effect helped create a quasi-monopolist with a 70 percent share of the beer market.
Again, no mention in Ms Correa’s book that Mr Lemann, contrary to free market consensus of non-governmental interference, probably trusted his close friend, President Cardoso, to lean on the country’s anti-monopoly agency (which two years previously had vetoed an alliance between Brahma and Miller Brewing) to give the merger the green light and only take AmBev, as the new company was called, to task in a mild way: the new firm was asked to divest itself of a beer subsidiary which had a market share of merely 5 percent.
Admittedly, President Cardoso may have only acted as midwife to a "National Champion", thus sparing AmBev the fate of Mexico’s Grupo Modelo – a brewer that stayed on its home turf and missed the boat so to speak, which led to its being swallowed up by AB-InBev this year. But a monopoly is a monopoly and readers will remember well the U.S. anti-trust agency’s tough stand on the AB-InBev-Modelo merger, which would have given AB-InBev a market share in the U.S. of slightly over 50 percent. This was not to be.
My major reservation against Ms Correa’s analysis of the trio’s rise is that she is too entranced by the trio’s phenomenal success to question their motives and means to achieve it. That does not seem to bother her Brazilian "PSD" readers, though, who seem to regard her book as a motivational piece of business writing that will show them how to get rich like Mr Lemann. At the end of June, "Sonho Grande" ranked second amongst the non-fiction bestsellers in Brazil.
