The brewmasters: Interbrew owns Europe. Now it's closing in on the United States through Brazil.

Belgian beer company Interbrew's March decision to buy Brazil's Companhia de Bebidas das Americas, known as AmBev--thus overtaking U.S. beer giant Anheuser-Busch to become the world's largest brewer by volume--caught many by surprise.

Interbrew CEO John E Brock called the US$12.8 billion merger, which creates an $11.9 billion in sales powerhouse with 14% global market share, "a very offensive move." AmBev CEO Carlos Alves de Brito, speaking to reporters after the deal's announcement, said, "In the globalized world there only exists one option for a company not to be left behind--to grow."

For Interbrew, the decision to swallow AmBev caps nearly two decades of buying around the globe, marked by deals across the Europe--as well as tangles with European regulators over its size--and in Asia. Now, through AmBev, Interbrew is poised to go after U.S. brewing giant Anheuser-Busch, which has its own global ambitions. And it seems likely to step on the toes of Mexico's FEMSA Cerveza by introducing the Brazilian company's Brahma brand as a new Latin American beer in the U.S. market.

Interbrew grew on billions of dollars in purchases or joint ventures. Among the biggest of those deals was the acquisition of Canada's Labatt in 1995, and, since 1999, the purchase of English brewer Bass and of German brewer Beck's.

The new deal allows Interbrew to market Stella Artois and Beck's in South America, where AmBev is the No. 1 brewer in Brazil, Argentina, Uruguay, Paraguay and Bolivia, places where Interbrew is noticeably absent. Until now, Interbrew's only presence in Latin America was in Mexico and Cuba.

"As Interbrew is in the No. 1 or No. 2 positions in 20 key global beer markets and is present in the top beer growth markets, like China and Russia," says Axel Gietz, Interbrew's senior vice president for corporate communications and public affairs. "Our ability to now enter South America gives us an even more balanced mix of developed and developing markets."

Global sellers. AmBev had been on a spending spree, too, around Latin America, becoming the world's fifth-largest brewer by spending $776 million on acquisitions and joint ventures since 1999. With the new merger, two audacious and acquisitive brewers will get access to each other's markets and distribution networks in order to make their flagship brands into global sellers.

Budweiser, made by Anheuser-Busch, remains the world's top brand, brewed in nine countries outside the United States and distributed in 70 countries. Bud's brand firepower comes from its No. 1 position in the United States, the world's largest beer market, followed by China, Germany and Brazil.

"The complementary deal gives AmBev a chance to expand into North America and Europe and gives Interbrew an opportunity to expand into South America, the world's highest-growth beer market after China" says Gietz. "This reduces the competition's ability to expand into South America."

Although the deal is an acquisition by Interbrew, it is a highly atypical one that looks more like an alliance or partnership. It gives AmBev, the acquired company, considerable independence, power and growing room. Both AmBev and Interbrew will keep their separate stock exchange listings. AmBev's controllers will have a 25% equity stake and four board and governance seats in InterbrewAmBev, while Interbrew's controllers have a 50% stake, four board and governance seats. There will be six independent board members, not appointed by either company.

AmBev's three controlling shareholders--Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles--are former investment bankers whose 52.8% AmBev control stake is being bought by Interbrew. They made the deal with Belgium's de Spoelberch, Van Damme and de Pret families, who control Interbrew with a combined 63.7% stake, in order to stay and Wow in the beer business.

"AmBev's three major shareholders and the three Belgian families shared a common vision regarding company growth," says Gietz. "And since Mr. Lemann, Sicupira and Telles wanted to stay in the brewing business, an unprecedented type of deal was designed to let them do so."

Through stock swaps and cash, Interbrew took control of AmBev but will sell Labatt's to AmBev for stock and assumed debt. Thus AmBev got 70% of Labatt USA, Labatt's U.S. distribution arm, and a 30% chunk of FEMSA Cerveza. Through these holdings AmBev could put Brahma on the U.S. market while Interbrew moves into South America. The deal will close before the end of 2004.

Collision course. The companies saw the various beer brands entering each market as a new offering, not necessarily competitors. But FEMSA saw that the marketing strategy put Brahma on a collision course with FEMSA's brands in the United States, mainly Sol, Tecate, and Dos Equis.

FEMSA's U.S. unit, Wisdom Import Sales, in March filed suit in a New York district court to block parts of the AmbevInterbrew merger.

FEMSA's controlling shareholders, with a 70% stake FEMSA Cerveza, had first-refusal rights to Interbrew's 30% stake. On May 24 FEMSA told Mexico's stock market that it had agreed to buy those shares from Interbrew for $1.25 billion in cash--of which $500 million will be raised on Mexican and U.S. stock markets--taking complete control of the unit. FEMSA had feared that AmBev-controlled Labatt USA could buy the stake instead, cutting the Mexican bottler out of a company that distributes the Mexican company's brands in the United States.

Labatt USA will continue to import FEMSA's beer brands for a few months, FEMSA said in a statement, while it prepares to take over importing, marketing and distribution of its brands in the United States. The deal is contingent on regulatory approval of the AmBev Interbrew merger.

"From the point of view of our shareholders, moving from 70% to 100% ownership of FEMSA Cerveza represents a substantial increase in one of the most profitable beer markets in the world, and the precise moment and at the tight price," said Jose Antonio Fernandez. FEMSA's chairman, in a statement.

In the most recent challenge to the Interbrew-AmBev merger, Schincariol, Brazil's second-largest brewer with a 14.8% market share, in March filed a complaint with Cade, Brazil's anti-trust agency, saying that the deal strengthens AmBev's monopoly power and does economic harm to local competitors.

Interbrew and AmBev's joining forces means that together they will have greater economy of scale, greater purchasing power with suppliers, and greater cash flow, says Vinicius Camargo Silva, Schincariol's lawyer. "This deal will cause the merged company to either arbitrarily increase profits or use its increased margins from economy of scale or purchasing power advantages to wage a price war," Silva says. "A price war's immediate effect might be good for the consumer but the long-term effect would be to force competitors out of a market, and then, once the merged company dominates the market, set a price that the consumer is forced to accept."

Easy money. Paulo Macedo, the director of corporate affairs for Cervejaria Kaiser, Brazil's No. 3 brewer at 11% market share, which is 80%-owned by Canadian brewer Molson and 20%-owned by Dutch brewer Heineken, says that the deal does not threaten Kaiser and gives InterbrewAmBev access to financing in the United States and Europe that AmBev would not have gotten alone.

"The deal will give AmBev access to the considerably cheaper foreign credit, a capital cost advantage that Kaiser now has because it is owned by Canadian and European breweries," Macedo says. "But I don't think the Brazilian beer market will be greatly affected by the deal. Interbrew is not going to try to sell mainstream brands in Brazil that compete with Brahma or our Kaiser brand."

AmBev is expected to argue before Cade that the increased operational and administrative synergies the deal creates will lower prices and benefit the consumer. This was the argument used in 2000 by Brazil's then-top brewers, the Companhia Cerverjaria Brahma, controlled by Lemann, Sicupira and Telles, and the Companhia Antarctica Paulista, which merged to create AmBev. Cade bought that argument and approved the deal with some minor brand sell-off requirements. Since the merger AmBev brands have been competitively priced but not low-priced.

"There is no reason Cade should contest the Interbrew AmBev deal," says Alexandre Viera Loures, AmBev's foreign communications manager, "given that it's a body that concerns itself with market concentration and given that Interbrew's beer exports now account for .001% of the beer market here."

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