Freddy Heineken's Recipe May Be Scrapped

To thrive, the brewer could be forced to try big acquisitions

He was the marketing whiz who dressed Heineken beer in green. He was the visionary who understood that a good brew could travel and proved it by turning a venerable Dutch lager into the best-known beer brand in the world--the sudsy equivalent of Marlboro or Coca-Cola. Through it all, Alfred "Freddy" Heineken turned his controlling one-quarter stake in the family business into a $4 billion fortune, Holland's biggest. And when he died in early January at 78, he left behind one of Europe's storied family-controlled empires.

But family companies, even rich ones like $8.7 billion Heineken (HINKY ), tread uphill in the global economy. For years, Heineken has had to limit acquisitions and rule out mergers in order to leave Freddy Heineken in control. Now, as his fortune passes to his daughter, Charlene de Carvalho, a housewife and mother of five in London, the rules could change. "This could be Heineken unchained," says Michael Kraland, the Dutch president of Trinity Capital Partners, a Paris investment firm.

Heineken officials insist that nothing will change in the way the brewer does its business. They say the April retirement of Chief Executive Karel Vuursteen and his replacement by longtime No.2 Thony Ruys, 54, spells continuity. And Heineken's son-in-law, Michel de Carvalho, a vice-chairman of Schroder Salomon Smith Barney in London and Heineken board member, speaks for his wife, saying: "We won't deviate from the old man's principle."

Trouble is, the old man's principle looks increasingly out of date. In Heineken's key European and American markets, demand is flat. This is pushing growth-hungry brewers to buy their rivals. Heineken has been snapping up bite-size national brewers from Italy's Moretti to Spain's Cruzcampo. But in big deals it's getting outflanked by its chief rival in Europe, Belgium's Interbrew. In two years, Interbrew has dished out $5.5 billion for brands such as Germany's Beck's and Britain's Whitbread and Bass. Now Interbrew is vying with Heineken for the global No.2 position behind U.S.-based Anheuser-Busch Cos. (BUD )

So it's decision time for the family. To stay in the global game, Heineken will need money--lots of it. Vuursteen insists the blue-chip company can borrow what it needs, even the billions of dollars for major takeovers. But as Heineken takes on rivals in crucial growth markets from China to Latin America, it will need all the flexibility it can get. If Heineken execs don't have the power to sell new shares to raise cash for an acquisition, or to use shares as takeover currency, the venerable Dutch brewer could lose out in bidding wars and see growth stagnate. But if the company takes either of those routes, the family's grip--it controls just over half of the holding company that in turn holds a hair more than half of Heineken stock--would no longer be decisive. Vuursteen, who works in the Heineken family's old portrait-lined living room, now part of the Amsterdam headquarters, acknowledges that "in the long term, nobody knows what will happen."

Heineken's conservative approach has served shareholders' interests just fine up to now. With its dominance of Europe and a luxury niche of 2.2% of America's vast market, Heineken has raked in double-digit earnings and sales growth for much of Vuursteen's nine-year tenure. Schroder Salomon Smith Barney predicts a 15% earnings rise for 2001, to $711 million. And the stock, while down 20% in the past 14 months, is nearly double the level of four years ago.

For now, the family control protects Heineken from a takeover. Without that defense, analysts say, Heineken could find itself consumed by Anheuser Busch, or even Coca-Cola (KO ). More likely, Heineken will look to bulk up, financing acquisitions--at least for the next year or two--with bank loans. Targets? They could range from Philip Morris Cos.' Miller Brewing Co. to the family-controlled empires of South America. But if Heineken finds itself getting outbid again by feisty Interbrew, Freddy Heineken's family business could be in for a change.

By Stephen Baker in Amsterdam, with Christina White in Paris and Gerry Khermouch in New York

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