A Beer Hall Brawl for Third Place

Heady fights for control of Schlitz and Pabst

Something is dreadfully wrong in the Milwaukee beer-brewing business.

Last year a giant downtown Schlitz sign was replaced by one bearing the Budweiser label of St. Louis' Anheuser-Busch. That is a little like erecting a flashy Toyota sign atop the Fisher Building in Detroit. After all, Schlitz was "the beer that made Milwaukee famous."

The famous Milwaukee brewers have fallen on hard times. Schlitz no longer makes beer there. Takeover battles simmer among the suds, and mutinous stockholders threaten to dislodge entire boards of directors in nasty brawls not far above the barroom level. The brewers are in a battle for third place in the U.S. beer business, behind leader Anheuser-Busch and second-place Miller. Analysts believe that third largest is big enough to compete with the industry's leaders, but anything much smaller than that level cannot muster the advertising megabucks to fight off relative obscurity and low sales.

Jos. Schlitz Brewing Co., currently the third largest brewer, has a shaky grasp on that rung. Once the largest selling beer in America, Schlitz lost that position in the 1950s to Budweiser, then lost even more ground in the 1970s when it changed to a faster brewing process that yielded an inferior brew. Schlitz later returned to the original formula, but it has yet to win back all its beer lovers.

As a result, Schlitz is more vulnerable to takeover than a cold six-pack on a hot Saturday night. Last year it was approached by another famous Milwaukee name, Pabst, as well as by the G. Heileman Brewing Co. of La Crosse, Wis., a scrappy firm that has built itself into the fourth largest company in the industry by buying up regional brands. The Pabst bid, though, never went anywhere, and the Justice Department blocked Heileman's acquisition on antitrust grounds.

Carefully watching the developments around Schlitz was Peter W. Stroh, 54, president of the Stroh Brewery Co. of Detroit, founded by his great-grandfather, a German immigrant, in 1850. Stroh's is the largest family-owned brewery in America and the seventh biggest in the industry. Michigan and other Midwestern college students had chugged Stroh's for generations; Detroit Tiger baseball fans lazed to commercials for Stroh's on hot summer afternoons. In the 1970s Easterners began smuggling Stroh's out of its Midwestern market, turning it into somewhat of a cult beverage. Stroh's claimed to have a special flavor brought on by "fire brewing" in vats over direct flame instead of the steam-heated vats used by other brewers.

Stroh calculated that buying Schlitz would be a quick way to become third in the industry. It would also be a cheaper way to grow than building new facilities. The cost of building a new factory was between $60 and $80 per bbl. of annual productive capacity, but the Schlitz plant was only $25 per bbl. Expansion by acquisition was not new to Stroh. The company bought the F. & M. Schaefer Corp. of New York in 1981, giving it a beachhead in Eastern markets. On March 29, Stroh announced its intention of buying huge chunks of Schlitz stock, seeking two-thirds of it, or 19.7 million shares, at $16 each, for a total offer of $315.8 million.

Schlitz resisted, believing Stroh's price was too low and a better merger mate could be found. Detroit and Milwaukee were abuzz with rumors that another brewer would put in a higher bid for Schlitz, but by late last week the battle seemed over. Stroh had raised its offer slightly to $17 a share, and it already had 68% of the stock. The Justice Department said it would not oppose a Stroh takeover of Schlitz.

Stroh's victory will dampen Pabst's dream of becoming No. 3. Now fifth largest, Pabst is fighting off a takeover bid from Minneapolis Financier Irwin Jacobs, who has pledged to turn around the company's sagging fortunes. Pabst President William F. Smith, 46, and Jacobs, the largest single shareholder, have developed draft-chilled relations. Says Smith: "I was willing to listen to Mr. Jacobs' thoughts, and I found he didn't have any." Responds Jacobs: "I'm an alley cat. I look for trouble."

At last week's annual meeting, Jacobs showed up with his proposed slate of new directors, including former Minnesota Viking Fran Tarkenton. The meeting was adjourned to next week for voting results to be tallied. Jacobs seemed determined to take over the last independent among Milwaukee's great breweries, which stood at about a dozen at the turn of the century. Smith, though, vowed to resist.

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