Bitter Brew: The Rise and Fall of Anheuser-Busch and America's Kings of Beer Part 23

One year, Yusef Jackson, Jesse Jackson's son, joined in the fun. Having met the Fourth at one of Ron Burkle's Green Acres soirees, Yusef and his brother Jonathan had been allowed to purchase a successful A-B distributors.h.i.+p in the section of Chicago that was home to both the Bulls and the Blackhawks. The 1998 deal raised eyebrows in the city because of the brothers' ages, twenty-eight and thirty-two, respectively, their lack of business experience, beer or otherwise, and the fact that they appeared to have paid far less than market value for the company. Their father, who once threatened a national boycott of Anheuser-Busch over its minority hiring policies, reacted angrily when the media questioned the deal, saying it amounted to "racial profiling" of his sons.

Typically, the Fourth "fell head over heels in love" with one of the escorts in Key West. "She looked like Audrey Hepburn. He wanted her to meet his family. He said, 'Leave your job and come to St. Louis with me.' He seemed to be looking for something he could never find."

According to the intermediary, escorts who worked for different agencies and didn't know one another "all told the same story" about their experience with the Fourth. "He had some deep-seated stuff going on, a s.e.xual dependency that went way, way, way beyond Tiger Woods."

For all the money the A-B executives spread around town, they did not make many friends among the serving cla.s.s in Key West. "They were like cowboys coming off a cattle drive," said one former bar employee. "People were like, 'Oh, great, here come the Budweiser guys again,' and they'd roll their eyes because they were the cheapest sons of b.i.t.c.hes. They wouldn't tip. They didn't feel that they had to. No one would want to wait on them.

"The bellhops at the Hilton hated it when they came down. [The Fourth] was never expected to pay for anything. They'd always say, 'I got this. I got this,' and they'd shoo him away. And then we got stiffed.

"We hated the Budweiser people. They thought the whole town should stop because they were there. We were working for a living, and they would treat us like s.h.i.+t."

The former workers drew a sharp distinction between the Fourth and his guys, however. "They were obnoxious p.r.i.c.ks who acted like everyone was beneath them. He wasn't that way. He was always smiling, asking people how they were doing. His guys didn't give a s.h.i.+t."

"He was the nice, easygoing, mellow, fun-loving one who never asked for anything. He worked out every day. He'd party until three a.m. and be in the gym at five a.m. I never seen him drunk or high or anything. The other guys were drunk all the time, staggering, trashed."

Amid the baccha.n.a.lia, August apparently tried to maintain a level of control. "He made sure no one brought drugs on the [Big Eagle]," said one observer. "It was a big thing with him. You were not allowed to be on drugs or possess them." Once, when he learned that one of the escorts had called a cabdriver to bring her some c.o.ke, "he had her removed from the boat." The removal was effected by local police officers that worked off-duty security details for the Fourth. One of them was a.s.signed to wrangle the escorts. He "made sure the girls got where they were supposed to be or got rid of a girl if [the A-B executives] decided they didn't like her." He also made sure they didn't carry any recording devices or cameras after one escort obtained pictures of the Fourth "in a compromising situation, and she was made to leave town."

The Fourth's concern about people bringing drugs on board may have sprung from the fact that both boats belonged to Bernie Little, A-B's longtime distributor in north-central Florida, and one of his father's closest friends. And it could have been because he was on thin ice with his father for flunking one of the company's random drug tests. According to the story he told to at least one of his closest a.s.sociates, he tested positive for cocaine, and the results were relayed up the line from the human resources department to Pat Stokes's office to his father and the board of directors. But he'd managed to avoid the usual consequences-company-ordered counseling and subsequent dismissal-by vehemently denying that he had knowingly taken the drug. "He claimed that somebody spiked his drink; that he was at a party and someone must have given him something without his knowing it. He didn't report it because he didn't know it had happened."

The story was not credible, as anyone familiar with the properties and effects of cocaine would know. But August III and the board apparently bought it. "After some kind of negotiation, an agreement was reached in which the Fourth signed an affidavit swearing that he did not knowingly consume drugs and did not have a drug problem. He said it was an isolated incident and that he would never be involved in anything like it again."

In the 1997 Fortune magazine article, August III explained his philosophy on employee discipline. "Make sure your standards are high," he was quoted as saying, "and if someone doesn't meet those standards, take them out. I don't care whether it's family or not."

In 2002, in the wake of the failed drug test, he approved the Fourth's promotion to president of Anheuser-Busch, Inc., the position once held by Denny Long.

20

"A BAD APPLE AT THE TOP"

On June 16, 2002, August III turned sixty-five. He'd promised to be retired by then, telling Fortune magazine in 1997, "At that point, this is a younger person's game." Having seen what happened when his father stayed in the job too long, he always said he would never put the company or his successor through something like that again.

When the time came, however, he reneged. Rather than retire, he simply relinquished the t.i.tle of CEO and stepped away from the day-to-day duties of running the company, while retaining chairmans.h.i.+p of the board. To no one's surprise, Patrick Stokes was named CEO, marking the first time in the company's 126-year history that a nonfamily member was placed in operational control. August IV was elevated to president of Anheuser-Busch, Inc., the brewing division of the company.

Business Week magazine called it "a succession process as tightly orchestrated as any in the House of Windsor," with the Fourth in effect being given five years-until the sixty-year-old Stokes retired at sixty-five-to get his act together, while his twenty-five-year-old half brother, Steven, worked at their father's side to learn the business in case he didn't.

The Fourth was thirty-eight, the same age his father had been when he ousted Gussie and took over the company. With the possible exception of the Fourth and his team, however, no one thought he was ready to run the company. Business Week credited him with "showing an instinctive understanding of the kind of advertis.e.m.e.nts that stirred young men," but noted that "he hasn't made a name for himself in any other way": "He has never operated the company's network of a dozen breweries, managed its complex relations with independent wholesalers or run its international and theme park units."

August III declined to talk to Business Week for the November 2002 article about the management changes, leaving it to the Fourth and Pat Stokes to speak for the company and a.s.sure the financial community that all was well within the beer kingdom. The reporter pretty much ignored whatever Stokes had to say and pressed the Fourth about his reputation as a "hard-partying guy," pointing out that it could prove a "hindrance" for a company supposedly trying a promote the responsible use of its products, and asking him to respond to stories about his frequent business trips with "female companions."

It's unlikely the Fourth had ever been confronted so directly by a reporter about his private life, and it apparently caused him to lose his affable cool momentarily. Claiming that he paid for the expenses of any guests who traveled with him and always engaged in "responsible consumption of our products," he snapped, "I didn't get where I am today without performing."

Besides, he argued, his vaunted partying was actually a valuable form of research. "I think I have benefited from my lifestyle [by] being able to be very active in the marketplace," he said. "That has allowed me to understand our customer better and, hopefully, do a better job of creating products and images that are attractive to that customer."

The Fourth always dreaded the inevitable questions from reporters about his Tucson accident and the death of Michele Frederick. "Why do they keep bringing that up?" he often complained to his colleagues. "Why do you keep doing the interviews?" they sometimes replied. This time, he responded to Business Week with a spin that could only have been crafted by A-B's public relations department.

"That's a chapter that's never gone, that I will always remember," he said, apparently forgetting that he'd long claimed total amnesia about that night. "But I honestly believe that, as painful as the memory is, that experience will make me a better keeper of responsibility for our products." He seemed to be saying that some good had come from the tragedy after all, that Michele had not died in vain.

Business Week rubbed more salt into the Fourth's wounds by pointing out that his father apparently shared a closer bond with his younger half brother Steven and that his stepmother, Ginny, "has made no secret of her wish to see her son Steven take over the company."

"[Steven] spends a great deal of time with my father," the Fourth acknowledged. "He is a very smart guy and he does a great job for my father. Other than that, I can't really comment." Asked what he thought Steven's next job with the company might be, he replied tersely, "I don't know." Of his own future, he would only say, "I don't take anything for granted in this company. It's not a foregone conclusion that I'll go any farther.

"I love my father," he said. "Take a walk through my house and it looks like a father museum. Every picture on the wall is of my father, or me and my father-to the point where Mom comes over and says, 'where are all my pictures?'" (One Father's Day, he gave his dad a twenty-minute video he'd commissioned, showing moments they'd shared over the years, and he told friends that his father had cried when he viewed it.) "But he's been extremely tough on me," he told Business Week. "Maybe you can call it tough love."

Or indulgence. After all, his father had spent millions of dollars and an enormous amount of time and energy s.h.i.+elding him from the consequences of his actions. And now, with three strikes against him-Tucson, the St. Louis police chase, and a flunked drug test-he was getting yet another swing of the bat in a position that paid him nearly $2 million a year (in salary, bonus, and stock), with a ridiculously generous expense account and the use of a helicopter and a private jet. His father had even helped him acquire a new $3 million mansion on ten wooded acres in Huntleigh Village, where his grandfather Gussie and great-grandfather August A. once rode after the foxes in the Bridle Spur Hunt.

The Fourth bought the 6,500-square-foot, six-bedroom home from hockey star Brett Hull and turned it into a high-fenced fortress with an elaborate security system that featured surveillance cameras around the house and grounds and ballpark-style banks of outdoor lights that lit up the entire property at night so that no one could approach the house without been seen, recorded, and very likely set upon by his dogs. He created yet another safe haven where he could do what he wanted without fear of interference from any higher authority. All it lacked was a moat.

More than just fodder for the financial media, the relations.h.i.+p between the Fourth and his father was a matter of constant conversation inside the company and the Busch family. Among the latter group, there had long been concern that August III was in denial about the nature and extent of the Fourth's partying. In 1984, Adolphus IV went to August III about rumors of his son's cocaine use. "I need to talk to you because I am hearing that August IV has a serious drug problem," he said. "I don't have any agenda; I'm not thinking you are going to can his a.s.s and ask me to come down there and go to work. But if people are telling me about it, then it has to be all over the whole city." August III confronted the Fourth, who said the rumors were not true.

By 2002 August III should have had, at the very least, a strong suspicion that the Fourth had a predilection for overindulgence. And yet, despite all he knew or suspected, August still put his son in charge of the brewing division, which accounted for 77 percent of the company's $12.9 billion in sales and 94 percent of its net income.

What was he thinking? He was not a reckless man. In business at least, he carefully planned and vetted every move. So why then did he risk handing the Fourth more responsibility, more authority, indeed, more temptation? "That's the biggest contradiction in the man," said Adophus IV. "He held everyone accountable. He held everyone to the line, except when it came to his own son, who would take over the company, even though [August] knew for twenty-seven years the problem his son had."

The most logical, credible explanation was that even after all the heartache and embarra.s.sment the Fourth had caused, and in spite of the disappointment, frustration, and rage that August felt, he still believed in his son. So he doubled down on the bloodline, betting that his firstborn would finally emerge from his wild oats phase, settle down, get married, and run the h.e.l.l out of the company the way four generations of Busch males had done before him. And he hedged his bet by staying on as chairman longer than he'd planned. The media speculated it was because he couldn't bring himself to relinquish control, and while that may have been true, it was just as likely that he felt he had no choice.

The five years preceding the Fourth's promotion to president had been good ones for the company. While the industry had grown by an anemic 2 percent, A-B's net income had increased by nearly 12 percent. "We were driving the growth in the industry," said one executive. "Without us, the industry would have shown a decline." During a time when the S&P 500 had remained flat, the price of A-B shares had risen 61 percent, and the stock had split two-for-one twice. For the first time, A-B pa.s.sed the 100 millionbarrel mark. Its total of 101.8 million barrels in 2002 bested second-place Miller by more than 63 million barrels and added up to a 49.2 percent share of the U.S. market.

A-B's continued dominance helped move Miller's parent company, Philip Morris, to finally throw in the towel in its thirty-one-year adventure in the beer business. In May, the cigarette maker sold Miller to London-based South African Breweries Ltd in a deal valued at $5.6 billion in stock, cash, and a.s.sumed debt. The merged companies would be called SABMiller.

August III no doubt took considerable pride in the fact that A-B had vanquished a compet.i.tor as formidable as Philip Morris, and he surely felt a measure of personal satisfaction in Forbes magazine ranking him as the best-compensated CEO in the food, drink, and tobacco industry, averaging $13.5 million per year in salary, bonus, and stock benefits. But the creation of SABMiller was a troubling development. It pointed up A-B's main vulnerability.

Prior to the merger, SAB had been the world's fourth-largest brewer, and Miller the sixth. Together they const.i.tuted the second-largest brewing operation on the planet, behind Anheuser-Busch. A-B's No.1 ranking was based on the volume of beer it produced, however, not the breadth and scope of its operation, and the company sold 90 percent of its beer inside the United States, making it a powerhouse domestically but a comparative weakling overseas. With U.S. per capita consumption trending downward, brewing industry experts scoffed at August's idea of achieving a 60 percent share of the market, believing that A-B was rapidly approaching saturation level at 50 percent. In order to grow, the company needed to expand in the international marketplace. SABMiller made that more difficult.

August had begun moving cautiously into foreign markets in the late 1980s, usually by entering into equity-based partners.h.i.+ps with leading breweries that gave A-B a controlling interest in a joint venture to brew and distribute Budweiser in their country and a minority stake in the brewery itself. It was a conservative strategy that allowed A-B to control the quality of its product while avoiding the debt that would result from buying the breweries outright. In this way, A-B gained a foothold in the 1990s in three of the world's highest potential markets, acquiring a 10 percent stake in Tsingtao, the largest brewery in China, a 37 percent interest in Grupo Modelo, the largest brewery in Mexico, and a 10 percent interest in Antarctica, the second-largest brewery in Brazil.

At the same time, however, August had pa.s.sed up a chance to buy South African Breweries before it began gobbling up smaller breweries in Central Europe-including Pilsner Urquell-on its way to becoming a global player capable of mounting a multibillion-dollar purchase of Miller. He could have gone after Guinness before it was acquired by the British food and beverage giant Grad Metropolitan, but he didn't. Nor did he make a play for Canada's No. 1 brewer and A-B's longtime Canadian distribution partner, Labatt, when it became the target of a hostile takeover attempt in 1995 and ultimately agreed to be bought by the Belgian powerhouse Interbrew SA for $2 billion.

August's unwillingness to risk more of A-B's enormous wealth to acquire controlling interests in foreign breweries frustrated and sometimes infuriated some members of his strategy committee who worried that he was being penny wise but pound foolish at a time when the industry was consolidating globally. After buying Labatt, for example, Interbrew scooped up two of England's biggest brewers, Whitbread (for $600 million) and Ba.s.s ($3.47 billion), along with Germany's Beck's ($1.58 billion). SABMiller acquired a controlling interest in Italy's Peroni ($256 million) and Holland's Grolsch ($1.2 billion). Closer to home, SAB Miller acquired Grupo Bavaria, Colombia's largest brewery (and the second largest in South America) for $7.8 billion in 2005, the same year that Adolph Coors Co., America's third largest brewer, merged with Canada's largest, Molson, in a stock swap deal worth $6 billion. Prior to the merger, Molson and Coors were controlled by the families that founded them (in 1786 and 1873, respectively).

And yet, amid all the rapid consolidation, August III seemed to be channeling his father toward the end of the old man's reign, trying to avoid spending money by scuttling deals that members of the strategy committee brought to the table.

As one former committee member recalled, "At the last minute, twenty-four hours before the deal was to be signed, he would say, 'We are not going with that price; we are going with this price.' We'd say, 'But then you are going to crater the deal,' and he would say, 'Fine, we will crater the deal, but I am not going to pay that price.'"

Even August's corporate planning mentor and longtime consultant Robert Weinberg agreed that, in hindsight, his foreign expansion strategy was too cautious.

"August is a d.a.m.ned smart man, one of the few people in the business who was significantly smarter than he thought he was," the eighty-four-year-old Weinberg said recently. "And he could move mountains if someone could convince him the mountains could be moved and this is the way to move them. But I don't think he was willing to take big enough chances. When push came to shove, he was too conservative. And when you are too conservative, you are throwing away opportunity."

August's Brazilian adventure in the 1990s is a case in point. A-B was the first American brewer to invest in Brazil, which was then the world's fastest-growing beer market, increasing at a rate of 15 percent a year. August first attempted to strike a deal with Brazil's biggest brewery, Brahma, which was owned by a trio of investment bankers-Marcel Telles, Carlos Sicupira, and Jorge Lemann. With a combined personal net worth of $10.6 billion, the three men also controlled the retail giant Lojas Americanas, known as "the Wal-Mart of Brazil." August hosted Telles and Lemann at A-B's theme park resort in Williamsburg, Virginia, and gave them a personal tour of the brewery there. In the end, however, he invested $105 million in Antarctica instead because, typically, he thought Brahma's price was too high.

Several years later, Telles, Lemann, and Sicupria approached August with an audacious proposal to merge Anheuser-Busch, Brahma, and Antarctica into a western hemisphere behemoth that they characterized "the Coca-Cola of beer." August said no to the idea, and two years later, in 1999, the brash Brazilians bought Antarctica out from under him and merged it with Brahma to form AmBev, becoming the world's third-largest brewer. August still could have joined the merger because A-B's deal with Antarctica gave it the option to increase its stake to 30 percent and place a representative on the board. Once again, however, August thought the price was too high, and he opted to sell back A-B's minority stake in Antarctica.

"The evaluation he got from his corporate planning a.n.a.lysts and consultants convinced him that if he bought into AmBev, the impact on the stock would be a 10 to 20 percent decline in the short term," a former executive said. "It would have a negative impact on corporate earnings, so stock a.n.a.lysts would hammer them."