March 3--The private equity firm slated to be the next operator of the H.J. Heinz Co. is no stranger to shaking up historic U.S. companies founded by industrious families that built powerhouse brands.
In late 2008, the co-founders of 3G Capital engineered the $52 billion takeover of Anheuser-Busch, whose Budweiser means as much to beer drinkers and St. Louis as Heinz means to ketchup lovers and Pittsburgh.
The acquisition of the King of Beers spawned big changes in St. Louis, where thousands collected a paycheck from Anheuser-Busch, where suppliers thrived on the brewer's growth and where charities benefited from the company's generous -- and often times extravagant -- spending.
Four years later, the beer maker employs fewer people in St. Louis, takes longer to pay its suppliers and donates less to charity. The changes have made Anheuser-Busch InBev a financial success, but they could leave Heinz employees and Pittsburgh uneasy about what lies ahead.
"InBev is an efficiency, supply-chain logistics expert," said Bump Williams, a Connecticut-based beverage industry consultant. "If there's any way to reduce costs, they're going to do it.
"They know how to make a [profit-and-loss] statement sing."
That is reflected in the $2.25 billion in cost cuts and efficiencies AB InBev has realized since taking over. The new owners immediately reduced the brewer's salaried work force by 1,400, or 6 percent. About 75 percent of the jobs eliminated were in the St. Louis region. The layoffs were in addition to the early retirement incentives taken by more than 1,000 salaried workers.
Those cost reductions were more than five times greater than the cuts that former management, headed by August Busch IV, was pursuing prior to selling the company
"These guys are world-class, tough, tough, tough cost cutters," said William Finnie, an Anheuser-Busch executive for 26 years.
"They focus on cash flow and they will make it happen," said Mr. Finnie, who left the company in 1991 and is now a business strategy consultant in St. Louis. "They will significantly increase the cash flow from Heinz. They know how to do that."
3G Capital is teaming with Warren Buffett's Berkshire Hathaway to acquire Heinz for $28 billion. The price tag includes $5 billion in Heinz debt that the new owners will assume. Mr. Buffett is primarily the banker, while 3G Capital will manage the joint venture.
The New York private equity firm's Brazilian co-founders -- Jorge Lemann, Carlos Sicupira and Marcel Telles -- got their start in the beer business in 1989 when they acquired Brazil's second-largest brewer. A string of acquisitions followed, capped by a 2005 merger with Belgium's Interbrew to form InBev, the world's largest brewer.
Alex Behring, 3G Capital's point man for Heinz, did not disclose his plans at the Feb. 14 press conference announcing the deal. "This is a company that's doing extremely well as it is," he told reporters.
Many observers expect he will take the same sharp knife approach 3G Capital is known for. How that plays out at Heinz may be different than it did at Anheuser-Busch, given the significant differences between the two deals.
Unlike Anheuser-Busch, which had extensive production facilities in St. Louis, Heinz has none in Pittsburgh. Its 1,200 employees in the region work at the company's global and North American headquarters as well as a research center in Marshall.
Mr. Buffett, known for his fondness for well-managed companies with respected brands, was not involved in the Anheuser-Busch buyout, which was completed as the U.S. economy descended into the Great Recession. 3G Capital's beer roots are broader and deeper than its food roots. The private equity firm took Burger King private in 2010 before selling some of the fast-food company's stock to the public last summer.
In yet another difference, the last time a member of the Heinz family ran the company was in the mid-'60s, but the Busch family kept tight reins on their brewery until the takeover.
Their free-spending ways were legendary. William Knoedelseder, author of a history of Anheuser-Busch, recalled that when Budweiser sales fell in St. Louis in 1954, CEO August "Gussie" Busch Jr., invited 11,000 distributors, retailers, bar owners and others who sold his beer to dinner parties at his home and hosted 1,000 of them nightly for 11 consecutive nights. Time magazine reported that sales in the region jumped 400 percent, Mr. Knoedelseder wrote.
"Anheuser-Busch spent an awful lot of money making friends," Mr. Williams said. "But that's the way Anheuser-Busch operated and that's why they got to 53 percent of the business."
Said another former brewery executive who asked not to be identified: "People never realized how ridiculously generous Anheuser-Busch was."
Making suppliers wait
One of the first things to change once 3G Capital's Carlos Brito assumed control of Anheuser-Busch was how fast the brewer paid its bills. Instead of 30 days, suppliers were told they would get their money in 120 days. The change was particularly hard on the brewer's small suppliers.
"Anybody that's a small company in these times, that's a killer to wait four months to be paid," said Stephen Brock, the owner of Supplier Industrial Solutions. "Our suppliers want their money in 30 days."
The Granite City, Ill., company has six employees. It still sells a small amount of pipe, hoses and connectors to the brewer.
"Basically, they're off the radar for us," Mr. Brock said. "We don't pursue it like we used to. The more business we do with them, the longer we would have to wait to be paid."
Furor over the policy was not limited to small suppliers. According to press reports, St. Louis-based Emerson Electric was so upset that it stopped serving Anheuser-Busch products at corporate events. The decision was unusual given that August Busch III has served on Emerson's board since 1985. One of his fellow directors is Heinz chairman, president and CEO Bill Johnson.
The Anheuser-Busch Foundation, the brewer's charitable arm, donated $11.4 million in 2011, according to its latest annual report filed with the IRS. That's down from $14.7 million in 2009.
"The scope of their giving narrowed dramatically," said one person who is on the board of several St. Louis charities and asked not to be identified.
One of the city's craft brewers said Anheuser-Busch had generously donated cash as well as its products to local charities.
"We get approached daily by local not-for-profits who tell us that they no longer are supported by AB InBev and ask us to aid them," said the brewer, who asked not to be identified.
Cindy Erickson, CEO of the American Red Cross of Greater St. Louis, said AB InBev remains "one of our gold standard partners." The company continues to donate and support blood drives and other initiatives, she said. Donations can fluctuate from year to year based on the need for disaster relief funding and other factors, she said.
IRS records show that the foundation gave the Red Cross' local chapter $300,000 in 2011 vs. $825,000 in 2009.
The H.J. Heinz Foundation donated $2.5 million to charities, according to its most recent annual report to the IRS. Heinz's agreement with 3G Capital and Mr. Buffett requires them to maintain Heinz's charitable giving "in a manner and amount consistent with past practice."
It also specifies that Pittsburgh will remain Heinz's headquarters.
Heinz spokesman Michael Mullen declined to comment on whether the provisions are for a specific period of time. He also declined comment on how the provisions would be enforced if they were violated.
Enforcing them would be difficult, according to Andrew Grumet, a New York attorney who represents charitable organizations. Mr. Grumet has never heard of a case involving an acquirer who was sued for not living up to such promises.
Anheuser-Busch production was declining when 3G Capital's lieutenants arrived in late 2008, a trend that has continued. The company's two top brands, Bud Light and Budweiser, sold 56.4 million barrels last year, down from 64.5 million barrels in 2008, according to Eric Shepard, executive editor of Beer Marketers Insights.
"The industry was down in 2009, 2010 and 2011, and the No. 1 brewer was going to take a hit no matter what," Mr. Shepard said.
Mr. Williams said that while the 3G Capital executives "are brilliant bankers," the jury is still out on their prowess as brew masters. He said a decision to produce Beck's, a German beer, in the United States backfired, angering drinkers who wanted a German-brewed beer.
"Sales trends [for Beck's] have been less than stellar, but they saved a lot of money doing it," Mr. Williams said, adding that the cost cutting has "absolutely not" affected the quality of Anheuser-Busch products.
Beer drinkers who filed a number of lawsuits in federal courts last week disagree. One of the complaints, filed in federal court in Philadelphia, said that after the takeover, the new owners "vigorously implemented" a policy of watering down the beer, "sacrificing the quality products once produced by Anheuser-Busch in order to reduce costs."
In a statement, the brewer said the claims "are completely false" and that it "proudly adhere[s] to the highest standards in brewing."
As for the cost cutting and other initiatives Mr. Brito ordered, the company said the changes have it "better positioned for growth" and "the global footprint of the company has brought new growth and career opportunities."
AB InBev per-share profits have jumped 56 percent since 2009 even though sales rose only 8 percent over that period. Through the end of last year, AB InBev investors had received annual returns of 27 percent since Mr. Brito took over, double the return provided by the S&P 500.
The results leave no doubt about 3G Capital's ability to capitalize on synergies from acquisitions. Whether it can boost sales by persuading more drinkers to buy its products -- be it beer or ketchup -- remains to be seen.
"Their ability to build brands is still an unanswered question," Mr. Shepard said.
Len Boselovic: firstname.lastname@example.org or 412-263-1941.
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