Detroit Free Press from Detroit, Michigan • Page 9

i OA DETROIT FREE PRESSSUNDAY, JULY 2, 1939 Stroll's Encounters series of problems Concorde on one trip, Mouatt said. On another venture, another River Place executive wanted to meet Prime Minister Margaret Thatcher, and Mouatt said he was able to arrange the meeting. The name Stroh "There was a perception, I think, a lot of money was available. Nobody ever said there were deep pockets, but' that's what the name engendered," Mouatt said. "Everywhere you went, they heard you say 'River but they thought they heard The name, was the thing." But the Strohs and thetf advisers proved unwilling or unable to consummate many of the deals.

Brewery profits were under severe pressure from competition in the beer industry. Meanwhile, construction of the Stroh River Place complex was proving more costly than expected. over breakfast, Peter, who is an avid newspaper reader, pulled out a copy of the Financial Times of London, said Mouatt. In it was a story about March Engineering, a British manufacturer of race cars, which was kwking for financial backing. Peter sent Mouatt off to Europe again to look into buying a chunk of the firm.

Elaborate negotiations followed. But at a meeting in England, the Stroh family balked at putting up a substantial amount of their own cash for the deal. Instead, Mouatt said, they hoped JT -j on tin People prepare to watch the fireworks at Stroh's headquarters on the Detroit River on Friday evening. mm "rty mm AS-h- 1 Free Press tile photo From left, David Mouatt, Gyo Obata of HOK, William Powers and Peter Stroh share the optimism when River Place Holdings and HOK bought architectural firm O. Germany in 1986.

The firm closed last year. tig ALAN KAMUDADetroit Free Press Stroh Brewery Co. Chairman Peter Stroh apparently has no family member ready or willing to take over after him. Share of beer market -falls; projects stall STROH'S, from Page 1A the business." Looking for a cash infusion, Stroh Brewery Co. hired investment banker Morgan Stanley Co.

in February, with the stated aim of finding a foreign brewery partner to buy a minority stake in Stroh's. But the most likely partners might not settle for less than a controlling interest. And industry analyst George Thompson, of Prudential-Bache in New York, suggests that for the right price the Stroh family would sell the entire company. Detroit has much at stake in the outcome of Stroh's negotiations with foreign brewers. If the Stroh family surrenders control, or cuts back its involvement, it's doubtful that successor managers would show the commitment to Detroit that prompted Peter Stroh to embark on the risky Stroh River Place office and retail development.

The Stroh family borrowed $66 million in 1985 to refinance Stroh River Place, but cash flow from the project falls short of what the Strohs need to meet debt obligations of the mortgage, forcing the family to make up the difference. Real estate experts estimate the shortfall is at least $1 million to $2 million a year. River Place Holdings also has lost pioney on attempts to buy a British racing car company, on a partnership with a New York City investment firm, and as owners of a defunct architectural and engineering company that once bid to design General Motors Saturn plant. People familiar with the ventures say losses have been substantial, possibly totaling millions of dollars. "'They really are one of the leading families of Detroit, and they're at a crossroads," said Arvid Jouppi, an auto industry analyst who has done consulting work for the Stroh family.

"I think if enough money came along, they would UeU." Peter Stroh and other executives of Stroh Brewery Co. declined requests for interviews. John Stroh Jr. said in a telephone interview that the lack of an heir apparent to Peter and the problems at River Place Holdings are confers of the family. But he said those poncerns had no effect on decisionmaking at the brewery, The temptation to sell could be great.

By various estimates, Stroh Brewery Co. is worth at least $600 million, with stock divided among dozens of family members. For this report, the Free Press (examined public documents, talked with beer industry analysts, and interviewed about a dozen people who worked for or had close business dealings with the Stroh family's private investment firm. A business under pressure Bernhard Stroh, a German immigrant whose family brewed beer in the Rhineland for generations, landed in Detroit in 1850. At the time, a company history notes, the local malt beverages were mostly ales and porters brewed in a heavy English or Scottish style.

Bernhard Stroh began to brew a fighter lager beer and personally delivered it in small kegs by wheelbarrow, In recent decades, Stroh's has managed to avoid the fate of dozens of other breweries failure or absorption by a larger rival. In the late 1970s, $troh began an aggressive expansion, buying Schaefer in 1981 and Jos. Schlitz Brewing Co. in 1982, mostly with borrowed money. Meanwhile, it demolished its antiquated brewery in Detroit in 1986; it no longer brews beer in Detroit.

"lt certainly has made the Stroh family a lot richer, there's no question," said analyst Jerry Steinman, publisher of the newsletter Beer Marketer's Insights. "Ten years ago, they had a 5'2-, 6-million barrel brewery, Which would have been out of business now by itself. Over the last 10 years, they've bought other breweries, paid off the debt. Now they have a 26 million-barrel brewery. They're worth fanrnore than in 1979." HBut the business is under pressure.

Stroh has shipped smaller volumes of beer each year since 1984, down to 20.4 million barrels in 1988 from a peak of 24.3 million barrels in 1983. Stroh also isjosing market share to the ever-more-powerful Anheuser-Busch, which now commands a towering 4 1 percent of the U.S. beer market, up from 26 percent a decade ago. Stroh enjoyed a 13 percent share in 1983, but slipped each year since to a low in 1988 of 10.7 percent. Profit figures are closely guarded at privately held Stroh's, but industry analysts say the brewery's returns are probably iny, no more tyan pennies per six-pack due to the competition.

to buy a 22 percent stake in March using only money borrowed from a British investment banker. March refused to go along without "good faith" money from the Strohs, and the deal fell apart. "I allowed myself to be totally deluded that these things were going to happen. They never did," Mouatt said. "I became a laughingstock in London, because I kept bringing this outfit over with this marvelous name, but there was nothing behind it." In another case, the Strohs bought into Saxon Capital, a New York City investment firm that helped arrange mortgage financing for commercial real estate deals.

But, it) little more than a year, said Saxon owner Dennis Frank, the Strohs changed their mind and sold their interest Sack to Saxon. Frank declined to discuss the finanqial details, but did not dispute that the Strohs lost money ori the turnaround. Mouatt said Powers tended to take the most optimistic view of their chances on investments. When the March Engineering deal was in the works, Mouatt told Powers the range of profit to expect from making race cars was 2.5 to 14 percent a "He took the 14 percent, went to the board, and said, This is a fantastic business, it makes 14 Mouatt said, though he concedes that later, when he spoke to the board, ne didn't do enough to temper their enthusiasm. Nowhere did such optimism hurt the Strohs more thap in financing thdr trademark Stroh River Place projecf.

The redeveloprflent of an old industrial complex on the riverfront was the Stroh family's vote of confidence in the city of Detroit, as the family described it at the time. But apparently they were unprepared for cost overruns and construction delays. "When we started River I think we were led to believe there was a shortage of class 'A' office space," John Stroh Jr. said. But, he noted, other developers saw the same need and rushed to fill it with a variety of projects ill the downtown area.

"That obviously makes it more difficult than it would otherwise be to get tenants.2 He declined, to estimate' specific losses, In 1985, with costs mounting and after successive refinancings of the project, they engaged in a complex arrangement with Oakland County developer Robert Sosnick and his partners. Under the deal, the Strohs in effect sold an interest in the 300 River Place building to Sosnick's partnership and accepted $66 million in mortgage funds in return, the money going for construction costs and other expenses. The agreement committed Stroh Brewery Co. to a long-term lease at the 300 River Place building. The 300 River Place building is the centerpiece of the development, home to the Rat tlesnake restaurant and as much space as Detroit's newest skyscraper, 'the 25-story Madden Building at 150 W.

Jefferson. But the $66-miilion mortgage case of borrowing more money than the project could support. It created shortfall between rents collected from tenants and what the Strohs owed as -a result of their mortgage and leaUe obligations. Two real estate experts consulted by the Free Press, who asked not to be named because they do business in Detroit development, estimated the shortfall at $1 million to $2 million a year. Barring another refinancing, the Strohs could be committed to make up that shortfall for years tcf come.

Still, John Stroh Jr. maintained, "River Place is not going vo be the tail that wags the dog." He said the crucial decisions affecting the future of Stroh Brewery Co. will be made solely on the basis of what's best for the company. Whatever those decisions are, industry analysts say that the brewery faces its greatest change. Analyst Jerry Steinman said that brewery officials acknowledged that "radical change is necessary for future success" when they began looking for a foreign partner.

However that search ends, Stein man said, "There is little doubt that Stroh will become fundamentally different STEVEN R. NICKERSONDetroit Free Press problems "really in any way affect any decisions on the brewery side. With regards to the specifics, it hasn't been a get-rich-quick scheme and I think everybody knows that." The saga of the Strohs involvement with Germany was just one of many that ended badly. When River Place Holdings bought into O. Germany in 1986, the engineering firm also had links with HOK, a major St.

Louis architectural firm, and was doing preliminary work for GM on the design of its Saturn plant. But two years later, due to a reorganization of HOK and disagreements with the Strohs over funding, the Troy-based firm had slipped from about 140 employees to around 80 and then shut down permanently. Germany says the Strohs still owe him money, $1 million according to one of his associates. "We sold them a viable company with a tremendous reputation. I'm appalled at what happened here.

It's a first-class disaster for all concerned, especially myself," Germany said recently. Germany's partner in O. Germany for many years was David Mouatt, an Englishman who has maintained business contacts in Britain. Mouatt is also disappointed with the collapse of the engineering firm. But, when the relationship was young, he and Peter Stroh seem to have hit it off, perhaps because of Peter's love of adventure and foreign travel.

Mouatt quickly became a sort of roving European ambassador for River Place Holdings, looking for good investments in Britain and France. When River Place Holdings first dispatched Mouatt to Britain to look for investments, he went with Albert (Bus) Hastings, a former General Motors vice president of facilities who, after retirement, went to work at River Place Holdings. Mouatt said River Place Holdings chief Powers had given them unspecified but optimistic commitments of money variously said to be $1 million or 1 million British pounds, Mouatt said. "1 thought, 'Heaven's come to Bus and I had a great time," Mouatt recalls. One deal they looked at that would have been "fun for Peter" was the purchase or lease of a hotel-retail complex on St.

James Street in London. It piqued their interest because the hotel was said to be the favorite of Peter's wife, Nicole, who is French and who married Peter in 1964. But the deal proved overly complex because the property was on the "Queen's list," making it eligible only for long-term lease rather than for sale. Mouatt said he also looked at deals in the north of England and Paris, but, again, they fell through. The initial disappointments did not dim enthusiasm back home.

Soon, other River Place Holdings executives were flying to Europe for thar own exploratory trips. Powers flewpn the cle and predecessor, the late John Stroh Sr. The elder Stroh was chairman well into his 80s and was famous for keeping long hours at the office. Even for Peter, the brewery was second choice. Graduating from Princeton in 1951 with a degree in international affairs, he had planned a career in government service.

Attracted by a campus recruiter and the promise of adventure, he joined the Central Intelligence Agency. But just after getting his final security clearance, he was walking through an intersection in Washington, D.C., when an out-of-control truck hit him from behind and smashed him against a building. He spent more than a year in a hospital and was told he might never walk again, although today the only indication is an occasional slight limp. But his dreams of adventure far from the brewery ended with the accident. "All of that went by the boards when I was hit by the runaway truck," he said in 1 981 during a rare interview.

"It wasn't until perhaps 1954 or '55 that I really had my legs screwed on properly. By then, I had become deeply involved in the business." He has not given any hint publicly that he may retire, and associates say he undoubtedly wants to stay until he is satisfied the brewery is in good hands. But, said Peter's cousin, John Stroh "I think Peter has probably more outside interests than my father did. I don't see Peter hanging around till he's 85, but you never know." Other Strohs of Peter's generation pursue other interests. John Stroh 54, lives in the Pacific Northwest, where he sails his boat from an island north of Seattle.

"It was always said of him, 'He lives for his said David Mouatt, a former executive with the family's investment firm. John Jr. attends board meetings in Detroit but shuns a wider role in the brewery, which would require him to live in Detroit. "Once a month is plenty, thank you very much," he said recently during a telephone interview. Peter's brothers, Gari and Eric, who are around his age, have played secondary roles in the company over the years, but neither ever has been considered a successor to Peter.

For example, Gari Stroh, who was thrown from a horse and disabled several years ago, has told associates over the years that he wanted to spend more time with his family than his uncle John did. Nor does the next generation of Strohs seem likely to produce Peter's immediate successor. One family member sometimes mentioned is John son, John Stroh III, who turned 30 in June and works at River Place Holdings, the family's investment firm. But he has yet to hold a significant job in the brewery. Peter's children, sons Pierre and Freddy, are both still around college age.

"There is no one ready right now," John Stroh Jr. said. Asked if the family would permit a non-Stroh to succeed Peter as chairman, John Stroh Jr. replied: "I think that obviously we have to get the best management-we can. If that's professional management, so be it.

We have some damn good professional management now." Investment plans go awry While their beer fortunes have slipped, the Strohs have had worse luck during the 1980s in many of their investments through River Place Holdings. Heading this firm was William Powers, a tax lawyer by trade, a former member of the Stroh board and a longtime friend and adviser to Peter Stroh. Frustrations over River Place Holdings' money-losing deals came to a head at a board meeting Feb. 14. Peter, John Jr.

and other family members rejected Powers' proposal to sell the brewery headquarters on the Detroit riverfront to the Talon Group, a privately held company with manufacturing and real estate interests. Under the plan, Talon Group employees would move in and Peter Stroh and other brewery executives would move next door to offices in another building in the River Place complex. But brewery executives were reluctant to give up their riverfront views and unwilling to invest the cash that Talon wanted to help Talon carry out its move and expansion. Powers declined requests to be interviewed for this report. With his proposal rejected and a string of problem deals behind him, Powers left the board and his job as head of River Place Holdings.

Within days, the Strohs cleaned house, firing or getting the resignation of several managers, and mid-level employees at River Place Holdings. River Place Holdings attributed the departures to cost-cutting. In hindsight, several people who did business with River Place Holdings say Powers, his aides and the Stroh family simply lacked the patience and know-how to dabble in their wide variety of investment schemes. "River Place meant well. There's no culprit there.

They just weren't competent," said Octavius (Dutch) Germany, an industrial engineer who helped General Motors design the De-troit-Hamtramck and Lake Orion plants and who later sold his firm, O. Germany, to River Place Holdings. John Stroh Jr. agreed that the losses at River Place Holdings have been a concern for the family. But he said he doesn't think the River jjlace "The feeling I have is that they're not making a lot of money.

Anheuser-Busch makes a good return on their money, but nobody else in the beer business comes close," Steinman said. Compounding Stroh's problems is that it is selling relatively more lower-priced brands like Old Milwaukee and relatively less of their premium brands, Stroh and Stroh Light. As in the auto industry, the bigger profits come from the higher-priced lines. One bright spot, notes analyst Steinman, is Stroh's non-alcoholic drink Sundance, which the company introduced nationally last year and which jumped to $100 million in sales in 1988, about 7 percent of the brewery's total revenue of $1.4 billion. To improve profits, Stroh laid off 150 people in 1988, cut its advertising budget by several million dollars and streamlined operations.

But at the end of 1988, the trend lines for its major products were still headed downward. In February, the company announced it would seek a foreign brewer to buy a minority stake in Stroh, to infuse capital and allow Stroh to sell more beer overseas. But there is widespread speculation among analysts that any buyer would demand a controlling interest in Stroh. Allan Kaplan, a beer industry analyst with Merrill Lynch in New York, speculates that the most likely course is a merger of Stroh and Wisconsin-based G. Heileman Brewing.

Together, they would own about 18 percent of the market, third behind Miller's 21 percent. Heileman is owned by Australia-based Bond Corp. Stroh officials have acknowledged talking to Bond, but add that discussions have taken place with other companies, too. Analyst Thompson thinks the benefits of such a merger would be limited, leaving the Strohs with few options. "Once you get somebody pulling away the way Anheuser has, then it becomes difficult because you're always playing catch-up," he said.

'Wears Detroit on his sleeve' Today, the key figure in the family and the brewery remains Peter Stroh. He's the sixth family member to head the operation since Bernhard Stroh. He shares the twin traits of many family members, a keen dislike of personal publicity and an enthusiasm for the Detroit community. "He wears Detroit on his sleeve," Jouppi said. But by the time Peter's generation came to the fore, there seem to have been fewer Strohs willing tf show the all-consuming dedication of Peter's un.