It´s tough running a family firm
August Busch IV and Carlos Fernandez have very little in common, except that they got their jobs at their respective companies the same way: because they are family.
Don´t assume that just because the international media have stopped pondering the role Grupo Modelo could play in Anheuser-Busch´s strategy to ward off InBev´s unsolicited offer that all is back to normal down in Mexico City. Carlos Fernandez, the 41-year-old Chief Executive of Grupo Modelo is fighting for his life, or less prosaically for his job.
His task is not made easier that he has to fight at two fronts: he has to placate his various family shareholders, many of whom would rather sell to Anheuser-Busch or SABMiller or whoever makes them a decent offer. And he has to put his defences in order in case InBev takes over Anheuser-Busch and will want to have a greater say in how things are done at Grupo Modelo.
Sounds familiar? Well, up north in St. Louis another man, who could hardly be called Mr Fernandez´s best pal, August Busch IV, 43, is fighting a similar battle. Both men, to date, have had fairly smooth careers. They both rose to the top not because they were the best men for the job but because they had been groomed for it. Mr. Fernandez´s uncle, Antonino Fernandez, ran Grupo Modelo for three decades. The younger executive´s marriage to the daughter of another company elder helped to clinch his rise.
August Busch III ran Anheuser-Busch for decades having masterminded a successful putsch against his own father. After his retirement and a brief interregnum by one of his confidants, his son became CEO of Anheuser-Busch in 2006.
Still, to blame both Mr Fernandez and Mr August Busch entirely for their companies´ current woes is unfair. Nevertheless, both have run their companies as if they owned them and surrounded themselves with advisors who are equally blinkered. Alas, Mr Busch and Mr Fernandez don´t own their companies. Mr Busch and his father control less than 2 percent of Anheuser-Busch´s shares. Although Mr Fernandez will one day inherit some or most of his uncle´s shares in Grupo Modelo that will not make him a majority shareholder.
For years – if not forever – the executive suites at both Anheuser-Busch and Grupo Modelo have shown a total disregard for their shareholders, especially for those family shareholders who do not work in the company and whose emotional tie to their investment is therefore non-existent. While business is good shareholders will keep quiet. Once business stagnates they will grow restless and demand “shareholder value”. That´s what is happening now.
Mr Fernandez is in a slightly better position than Mr Busch. When it comes to ownership he can rely on his Mexican shareholders who still have the majority of voting rights. Anheuser-Busch only has a 50 percent non controlling stake in the Mexican company.
Moreover, the Mexican shareholders are controlled by a voting trust. It was set up in 1993 when Grupo Modelo first had to face an internal shareholder revolt. After the phenomenal success of Corona Extra in the U.S. in the 1980s, sales in the U.S. declined for several years and many shareholders believed that this was it: Corona was on the way down. When Anheuser-Busch´s offer came along several shareholders wanted to sell out.
Anheuser-Busch initially bought a 17 percent stake in Grupo Modelo plus several options to be exercised. To give readers and indication how cautious (read “reluctant”) Anheuser-Busch is when it comes to buying a foreign company: Anheuser-Busch, for many years refrained from exercising these options although it meant that the Americans were losing out in profits. After the slump in the early 1990s, Corona began its phenomenal rise to number one import brand in the U.S. and profits began to bubble nicely.
As concerns the voting trust, it was set up to prevent any Mexican shareholders from selling their shares in order to maintain the now famously askew power relation in the board of Grupo Modelo. Observers have always wondered why the Mexican shareholders have never revolted against being subjugated by their board. Well, they cannot. Whoever masterminded the contract which binds the members of the trust together must have been a genius at scheming. Because according to Grupo Modelo´s 2006 annual report, the trust must always vote collectively. In other words, the members of the trust have to agree unanimously to sell their shares before any other shareholder can sell their shares. For as long as there is only one member of the trust who does not want to sell, the trust has the effect to prevent a change of control at Grupo Modelo. Clever.
That way Mr Fernandez position has been secured. For as long as his uncle is alive and as a trustee will vote against a sale, Mr Fernandez can pretend that nothing can harm him.
Unluckily, history is about to repeat itself. The sales of Corona Extra in the U.S. have been declining for two years now following the ousting Grupo Modelo´s erstwhile importer, the Gambrinus Company, at the end of 2006. Grupo Modelo formed a joint venture with drinks group Constellation Brands, Crown Imports, to import Corona Extra into the U.S. thus reaping its own profits and snubbing Anheuser-Busch.
It is more than likely that several Mexican shareholders will now want to sell their shares in Grupo Modelo to the highest bidder, thinking that Corona Extra is again on the way down.
Now, with Belgian-Brazilian brewer InBev´s effort to acquire Anheuser taking a hostile turn, Modelo finds itself in a ticklish spot. If InBev wins Anheuser-Busch, observers have remarked, Modelo ends up with a new partner − not of its own choosing and one much more aggressive than Anheuser-Busch about things like cost cutting.
Nor would InBev be likely to wait as patiently for control of Grupo Modelo as has Anheuser-Busch. Most industry analysts expect that Grupo Modelo ultimately will fall into InBev ´s hands.
“We are a proud Mexican company”, Mr. Fernandez has said of Grupo Modelo recently.
That holds true only if you have a selected view of reality and ignore that you have Anheuser-Busch controlling half of your company.
In any case, the world around Grupo Modelo is changing fast and even Grupo Modelo with its defences in place will ultimately have to face up to modern times.
