Modelo CEO Faces Limits of Family

Modelo CEO Faces Limits of Family Firm
By DAVID LUHNOW and DAVID KESMODELJune 27, 2008; Page B1
MEXICO CITY -- Carlos Fernandez, the 41-year-old chief executive of Mexican brewer Grupo Modelo SA, got the top job at his company the old-fashioned way: through his family.
Mr. Fernandez's uncle ran Modelo, known for its Corona Extra beer, for three decades. The younger executive's marriage to the daughter of another company elder helped to clinch his rise. For the past 10 years, Mr. Fernandez has grown into his role as the king of Corona, but he and his tradition-bound company are struggling to adapt to sweeping changes in the beer industry.
Reuters
Carlos Fernandez, far right, joins a toast after Modelo's listing in Spain in 2003.
Following a frenzy of acquisitions in recent years, a handful of global giants are emerging, making an endangered species of family-run brewers like Modelo and its U.S. partner, Anheuser-Busch Cos., which holds a 50% noncontrolling stake in the Mexican company.
Now, with Belgian-Brazilian brewer InBev NV's effort to acquire Anheuser taking a hostile turn, Modelo finds itself in a ticklish spot. Earlier this month, Anheuser asked Modelo to combine forces with it as an alternative to InBev's unsolicited $46.35 billion offer, which Anheuser rejected Thursday. (Please see article.) Modelo, caught off guard by Anheuser's proposal, is widely expected to snub the St. Louis-based brewer in order to keep its independence.
The task of steering Modelo's course between the two giants will fall to Mr. Fernandez. Like his counterpart August Busch IV at Anheuser, Mr. Fernandez was groomed for the executive suite from an early age. When he was 12, he began tagging along to Modelo's flagship Mexico City brewery with his uncle, Antonino Fernandez, then chief executive.
The young Mr. Fernandez worked part time at the plant during high school, doing everything from hauling sacks of barley to learning about fermentation.
Antonino Fernandez, who was born in Spain and fought for Franco's Nationalists in that country's brutal civil war, had no sons of his own, and he mentored his young nephew. Carlos Fernandez rose quickly. By age 28, in 1994, he was appointed to the board of directors as vice president -- and was the heir apparent. He took over as CEO at age 31, though his uncle largely continued to run things behind the scenes until just a few years ago.
But in the years since Mr. Fernandez began his tenure at Modelo, the role of family owners in the beer business has steadily diminished, with acquisitions yielding fewer and bigger players in the capital-intensive industry.
In 2005, the Molson family of Canada and the Coors family of Colorado merged their beer companies. The same year London-based SABMiller PLC, the world's leading brewer by volume, bought Colombia's Grupo Empresarial Bavaria SA from the Santo Domingo family, making the family major SABMiller shareholders.
This year Molson Coors Brewing Co. is combining its U.S. business with that of SABMiller, further limiting the influence of the Coors family over its eponymous brewer.
InBev, the world's No. 2 brewer by volume, is another symbol of the industry's change. The company, based in Leuven, Belgium, was created by the 2004 combination of Interbrew, controlled by Belgian families, and AmBev, controlled by Brazilians.
Meanwhile, Anheuser and Modelo have hugged the sidelines. That is no coincidence; both brewers are famously conservative. One of the few big differences between them: The Busch family holds less than 4% of Anheuser's shares, but three main families share voting control of Modelo, which sold a minority stake to the public in a stock offering in Mexico in 1994.
Burned in the past by Mexico's economic upheavals, Modelo has long refused to take on a single dollar of debt, preferring to expand using its own money. Like Anheuser, it has also repeatedly turned down opportunities to buy other beer companies.
A Modelo spokesman said the brewer has "opted for organic growth."
In 1993, Modelo decided to sell a big stake to Anheuser, but even that decision can be viewed as a conservative one. At the time, the North American Free Trade Agreement was set to kick in, and Modelo feared Mexico would be invaded by U.S. brewers as both countries slashed their tariffs on products like beer. It preferred selling half the company and gaining the security of a big American partner, instead of open competition.
But Modelo's conservatism has placed it in a difficult position. If InBev wins Anheuser, then Modelo ends up with a new partner -- not of its own choosing and one much more aggressive than Anheuser about things like cost cutting. Nor would InBev, the brewer of Stella Artois and Beck's, be likely to wait as patiently for control of Modelo as has Anheuser-Busch, people close to the companies say. Most industry analysts expect that Modelo ultimately will fall into InBev's hands.
"The world is changing around them," said Tom Pirko, president of California-based beverage advisory firm Bevmark. "Modelo is going to face more and more pressure to go beyond its Mexican-centric view and to really think about" expanding the global reach of its beers.
"We are a proud Mexican company," Mr. Fernandez has said of Modelo. A board member adds: "Our business is simple: We sell Mexican beers made by us in Mexico here at home and to the world."
Modelo may find change difficult. The company is so insular that even as it carried out talks with Anheuser this week about its future, the board of directors was kept entirely in the dark, according to several board members. The company declined to comment.
The two words most people in Mexico use to describe Carlos Fernandez are "young" and "nice." By all accounts, he is a family man who eschews the playboy lifestyle of many Latin American tycoons and is deeply religious, having attended two of Mexico's most conservative Roman Catholic schools -- Instituto Cumbres, for high school and Anahuac University for college.
A company spokesman would say only that Mr. Fernandez -- who declined to be interviewed for this article -- "is a practicing Catholic."
From Modelo's beginnings, many of the company's leaders have been known for their religious piety. The company's first patriarch, Pablo Diez, was a seminarian who nearly became a Dominican friar in Spain. Modelo was such a conservative company that hiring married female secretaries was frowned upon for decades because executives felt a married woman's place was in the home.
"If someone were asking you to paint a picture of Mexican culture and perspective and attitude, you could send them straight to Grupo Modelo in terms of how Mexicans think about who they are," Bevmark's Mr. Pirko said. "They really want to hold onto their own inherent set of values."
Even though the company had success abroad, Modelo doesn't view itself as a global company. As a result, the company has regularly missed acquisition opportunities. In 2001, for example, Modelo's planning department put together a deal to buy the leading breweries in both El Salvador and Honduras for roughly $500 million, according to several people close to the company. But Modelo senior executives turned down the deal. A month later, South African Breweries PLC, now part of SABMiller, bought the same breweries for a similar price.
Today, "Modelo's independence is threatened by deals they didn't do," says Credit Suisse Group analyst Carlos Laboy.
Write to David Luhnow at david.luhnow@wsj.com and David Kesmodel at david.kesmodel@wsj.com
Corrections & Amplifications
Carlos Fernandez joined a toast after Modelo's listing in Spain in 2003. An earlier version of this article incorrectly put the date at 1993.