by Eric Reguly

One of the main changes seen in Brazilian business over the last few years has been the move by Brazilian companies to become more active internationally, either by establishing plants and offices abroad or buying up foreign companies. Petrobras, Vale, Gerdau and Votorantim are among industrial groups which have bought foreign companies. One of the trailblazers was AmBev which merged with Interbrew of Belgium to form InBev in 2004. The Brazilian management put its stamp on InBev and is now targeting Anheuser-Busch which makes America´s most famous beer, Budweiser. Anheuser-Busch has turned down InBev´s offer but the ambitious Brazilians who run InBev have not given up and a hostile bid made directly to shareholder is on the cards. In this article, business columnist Eric Reguly, highlights a commercial ruthlessness among InBev´s Brazilian go-getters which oveturns the common view of Brazilians are a laid-back, relaxed kind of people.

In the beer world, it's called the "Brazilian factor" and it's code for ruthless cost-cutting done in an ever-so-charming way, like the assassin who smiles and pats your back as he thrusts the knife into your chest. InBev is a Belgian beer company run by Brazilians, led by CEO Carlos Brito. He and his team are ambitious cost-cutters. The Busch family of Anheuser-Busch fame knows this and must be terrified. On Thursday (june 26), Anheuser, maker of the Budweiser and Michelob beers, rejected InBev's $46-billion (U.S.) takeover offer as "financially inadequate." In response InBev said it would launch a hostile offer and seek a proxy battle to oust Anheuser's entire board. It was a brave, perhaps foolish, move by the ruling Busches. An unfriendly takeover, should it succeed, will make InBev even less keen to tread gently on costs.

InBev, whose leading brands include Beck's and Stella Artois, is the world's largest beer business. It achieved that status in 2006, two years after the company, then known as Interbrew, merged with Brazil's AmBev in an $11-billion deal. The Brazilians who ran AmBev rose to the top and now hold about three-quarters of the enlarged business's senior management positions. The empire includes Labatt, which was bought by Interbrew in 1995 and is no stranger to the Brazilian cost offensive. Three years ago, Mr. Brito closed Labatt's Toronto brewery.

To North Americans and Europeans, Brazil is a carefree land of beaches, bikinis and relaxed pleasure, where nothing is done today if it can be left for tomorrow. The image does not apply to Brazil's new breed of corporate champions. In 2006 CVRD (now Vale) won the gruelling takeover war for Canadian nickel miner Inco. Embraer is clipping the wings of Bombardier in the regional jet dogfight. And the Brazilians at InBev are turning the global beer market into their private vat. A former InBev executive I know says the Brazilians use "military culture" to run the place.

The Brazilians are making the most of an industry that is far less glamorous than the drink-beer-get-lucky ads imply. Beer ceased being a growth industry in most markets a long time ago. The industry's advertising gurus declare victory if they can increase a brand's market share by half a percentage point against a rival brand. The consolidation game is largely over. Against this tedious backdrop, the boys from Brazil know the best way to boost value is through margin improvement, which meant sparing no expense to reduce expenses everywhere. Mr. Brito, who started AmBev in 1989 with a small team of Brazilian investment bankers and a single brewery, has no sympathy for breweries that are not running at full capacity. The Brazilians are not keen on middlemen; they like to distribute their own brands instead of relying on wholesalers (as Anheuser does) to do the job for them (why give them a slice of the profit margin?). Acquisitions are integrated quickly. The management ranks are thin and the bosses are loaded with performance incentives such as stock options.

InBev trumpets the use of "zero-based budgeting," where operating budgets revert to zero at the end of the financial year and have to be renegotiated anew, usually at lower levels. Employees say nothing is sacred. If electricity costs have to come down, as they do, cafeteria lights are switched off. In Western Europe alone the Brazilians saved about €200-million ($316-million U.S.) a year through plant closures, layoffs, shared procurement and services and the like. And they did this within a couple of years of storming the Belgian headquarters.

The results are remarkable. Since the InBev-AmBev merger, the new company's EBITDA (earnings before interest, taxes, depreciation and amortization) have increased from 25 per cent of sales to 35 per cent - a 40-per-cent improvement. Since 2003, EBITDA has climbed by about €1-billion a year and reached €5.3-billion in 2007. Performance like this must impress August Busch, Anheuser's CEO. Anheuser is regarded as a flabby business. The potential for cost-cutting, or a takeover impelled by the lack thereof, probably inspired Warren Buffett to buy about 5 per cent of Anheuser in 2005 (making him the biggest single shareholder). Mr. Busch in effect admitted costs are too high by announcing in a letter to InBev that the company intends to increase savings to more than $1-billion by 2010, up from the previous target of $400-million.

If Mr. Busch says he can squeeze $1-billion from the Budweiser empire, you can bet Mr. Brito can take the figure 50 per cent higher. Add the synergies of using Anheuser's vast distribution network in the United States to sell InBev brands, and InBev's network in the Europe and Latin America to sell Anheuser brands, and you've got a compelling reason to merge the two giants. They could also combine their Chinese businesses to make a sizable dent in a country on the verge of becoming the world's biggest consumer market.
So why didn't the Busches consider InBev's $65-a-share offer, one that was pitched 18 per cent higher than the stock's all-time high price? Maybe they can get the price higher. Or maybe they're afraid the Brazilians will turn St. Louis into a desert, and hope they will go away.