Heineken’s metamorphosis
In recent years Heineken has developed from a cautiously managed company into an aggressive predatory player in the international beer market. The decease, in early 2002, of the ubiquitous Freddy Heineken who even after stepping back as chief executive controlled whatever happened at Heineken, and the appointment of a new CEO in April 2002 may well be two major landmarks in Heineken’s metamorphosis.
Elsevier Food International Vol.7, No.3, September 2004
Pascal Kuipers
Opportunities must be seized in the rapidly consolidating global beer market. The question is, however, at what price. Heineken missed several opportunities in the recent past, and saw its competitors walk away with the prey. But in 2003 Heineken successfully snatched Austrian brewer BBAG for €1.9 billion, the largest acquisition in its history.
In a speech in early March 2004, Heineken’s former executive chairman Karel Vuursteen reminded an audience of shareholders what the business climate was like in the 1990s. “The climate was booming,” he said. “You will remember that everything in that period was characterised by growth. Mostly this was not organic growth, but growth via, preferably, spectacular acquisitions. (…) This happened – in the spirit of that age – often with foreign capital. In those days, when I was chairman of the board at Heineken, I was often severely criticised for not following a similar strategy with Heineken. At the time it was perceived as being old fashioned if you did not go down the acquisition path with borrowed money and sharp financial methods. To put it bluntly: if you did not do that, you were a mug.”
The shareholders could not agree less, as they were – mostly disgruntled – Ahold shareholders and Vuursteen delivered his speech as Ahold’s newly appointed chairman of the supervisory board. “CEOs, like me, who in those days had a different opinion and were far more conservative in their line of approach, were as mentioned earlier not popular,” said Vuursteen.
Change in policy
How would Heineken’s shareholders respond to Anthony Ruys, who in April 2002 succeeded Vuursteen at the helm of Heineken and since then has radically changed the brewer’s policy? If the development of the share price is indicative of the new chairman’s appreciation, Ruys’ policy changes do not seem to be appreciated by investors. Since the end of April 2002, when Ruys started his job as CEO, the Heineken share lost some 40 per cent of its value.
Unlike Vuursteen, Ruys is far from being a conservative manager. With Vuursteen at the helm, Heineken was not involved in any of the major acquisitions that characterised the rapidly consolidating beer market. This changed almost immediately after Ruys’ appointment. The Dutch magazine FEM Business calculated that in 2002 Heineken spent some €1.2 billion on several smaller and medium-sized acquisitions, and in May 2003 Heineken announced the acquisition of the Austrian brewer BBAG – the largest acquisition in Heineken’s history.
Speculative but striking is the fact that this major acquisition happened some 17 months after the death of Alfred “Freddy” Heineken – grandson of the founder Gerard Adriaan Heineken – in January 2002. Freddy Heineken had controlled the company since the 1950s and after his retirement as chairman of the board in 1989, he retained his controlling stake in the brewer. At Heineken, family used to prevail over the executives and Freddy Heineken had the right to veto any decision of the executive board.
A spokesperson of Heineken denies Mr Heineken’s strict guardianship over the executive board. “The annual shareholders’ meeting was in control and the supervisory board checked the executive board,” she says. “The authority of the executive board has not changed since Mr Heineken’s decease.”
Via his controlling stake, however, Freddy Heineken had the decisive vote in the annual meeting of shareholders and after his death the Heineken family retained the controlling stake in the brewery.
Predatory player
The fact is that in a relatively short time at the helm of Heineken, Ruys has changed this company’s image from a cautiously managed company into an aggressive predatory player in the global beer market. So far, the BBAG acquisition has been the zenith of Heineken’s M&A activities. According to Heineken, buying 100 per cent of BBAG will cost some €1.9 billion, which it will fund from existing cash resources and a €1.2 billion credit facility from the banks. Despite the increase in interest costs – estimated by Heineken as approximately €100 million annually – the brewer expects BBAG to slightly enhance earnings in the current business year.
The BBAG deal surely offers future growth perspectives for Heineken. But it also points out the main problem Heineken has in the consolidating global beer market, where acquisitions have become an expensive growth strategy. The problem is access to capital while retaining the family’s controlling stake. Freddy Heineken’s daughter Charlene de Carvalho-Heineken inherited the 52 per cent controlling stake her father protected so cautiously. Financing growth by emitting new shares endangers this controlling stake in the Heineken Holding. If Charlene de Carvalho-Heineken wants to retain control over the company (see sidebar) she would have to cough up huge amounts of cash to acquire an accordingly high stake of the new shares to stay in control. In the case of the €1.9 billion BBAG-deal, this would mean an investment of €475 million which is not an option for a private person, as most of the inherited capital is fixed in Heineken shares. Borrowing money while using the Heineken interest as a pledge is dangerous, says FEM Business. This would make the family’s position dependent on the share price. Furthermore it would require De Carvalho-Heineken to pay an annual interest rate of some €24 million. And even then it is still uncertain whether other investors are willing to acquire new Heineken shares. These are less attractive when the company is controlled by one shareholding party.
Increased interest burden
The only option the company Heineken seems to have for financing growth is increasing its debt. In 2002, Heineken’s long-term loans totalled €1,215 million and in 2003 this amount soared to €2,721 million. Interest to be paid for this totals some €124 million annually. The increased interest burden might well offset the expected synergy gains that should come with the acquisitions.
Heineken’s spokesperson denies that the brewer runs a risk here. “There is no such risk, as interest payable is part of the decision to do the acquisition,” she says, pointing out Heineken’s options to finance future growth: “We can do this via internal cash flow, by emitting bonds (we successfully issued a €1.1 billion Eurobond in 2003) and via loans. Even an emission of new shares is not ruled out, but this has not been necessary up to now.”
By 2007, Heineken expects to save some €40 million in costs annually via synergy benefits of BBAG. This major acquisition should therefore also lead to a structural enhancement of earnings and Heineken is more than confident to deliver this. With BBAG integrated, Heineken is clearly the market leader in Central Europe, a region where the company expects consumption of beer to increase due to an expected increase in disposable income as a result of EU accession of several key markets. This assumption is, according to Heineken, “based on historic precedent.”
Further east is a generally recognised growth market for Heineken: Russia. Analysts regard a next step eastward to be a logical move after the BBAG acquisition. “Russia is one of the markets in which Heineken expects considerable growth potential,” says the brewer’s spokesperson. “In 2002, Heineken acquired the local brewer Bravo and since then there have been no acquisitions.” Rumour has it that Heineken has been attempting to acquire several brewers in Russia. These efforts have been in vain, so the brewer is concentrating on a greenfield development. “Acquisitions are still an option to Heineken, so is organic growth and a third option, namely building a new brewery,” confirms the spokesperson. Analysts from the merchant bank Kempen & Co. stated that in April 2004 the governor of the Russian province of Sverdlovsk in the Ural announced that Heineken would build a new brewery with a capacity of one million hectolitres, investing some US$40 million.
Options for growth
Heineken as a brand is sold in over 170 countries and the company owns over 115 breweries, located in more than 65 countries. For Heineken, all options for growth are open: via acquisitions or an increase in ownership (e.g. in Kazakhstan or China), organic growth from existing operations, joint ventures (e.g. with Diageo and Namibian Breweries in South Africa and with Lion Nathan in Australia), or by building new breweries in promising emerging markets (e.g. Vietnam, Nigeria).
As a rule Heineken wants to brew locally, but the only exception to this rule is the US. Here Heineken has a premium position as an imported beer brand that is sold at a premium price. Last June, Heineken USA clinched a deal with Mexican brewer FEMSA. Effective from the end of this year, Heineken USA has reached a three-year agreement to become the exclusive importer, marketer and seller of FEMSA’s beer brands in the US. The US is traditionally an important market for Heineken, but last year sales were disappointing due to bad weather conditions and the war in Iraq. Also, competition is fierce in the US. Mexican beers are very popular and Corona – brewed by Anheuser-Busch’s Mexican subsidiary Modelo – overtook Heineken and has been the most popular imported beer since 1997. With FEMSA’s brands Sol, Dos Esquis and Tecate, Heineken can compete directly with Corona and gain access to the Hispanic market, the fastest growing demographic group in the US.
The FEMSA deal will last three years. After this period, partners will decide what to do next. By then it may also be clear what the family’s position in Heineken will be. Maybe they will refrain from holding on to their controlling stake, which would liberate Heineken from a historical burden and set it free to attract foreign capital via the stock market to fuel further growth.
In 1973 Freddy Heineken founded L’Arche Holding in Switzerland. This private investment company held 50.005 per cent of Heineken Holding NV (Ltd). Two per cent of Heineken Holding was privately owned by Freddy Heineken himself, while 47.995 per cent is free-floating via the stock exchange. Heineken Holding has a 50.005 per cent share in Heineken NV (Ltd), the operational company responsible for the development and implementation of Heineken’s strategy. The remaining 49.995 per cent of Heineken NV is also traded via the stock exchange.
After Heineken’s death in January 2002, his daughter Charlene de Carvalho-Heineken inherited the shares worth some €3.4 billion. Dutch law looks at the residence of the testator and claims 27 per cent as death duties. That would imply a tax payable of €850 million, which De Carvalho-Heineken could only pay by selling shares and therefore losing control of the company.
Heineken managed to bypass Dutch law by arranging that his daughter would inherit shares in a Swiss private company. She also has a Swiss passport and is registered as a resident of the Swiss town of Perroy, where the Heineken family owns a house. In compliance with Dutch law, De Carvalho-Heineken reported to the Dutch stock exchange authorities that she inherited a total share of 52.005 per cent of L’Arche Holding. The 50.005 per cent majority, however, was inherited indirectly, she claimed, and therefore not subject to Dutch death duties.
Source: FEM Business
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