NEWS ANALYSIS: The Beer War

A ferocious and potentially damaging takeover battle rages between brewing giants S&N and Carlsberg. Ron Emler outlines the protagonists’ strategies and analyses the possible impact of outside interests entering the fray

Neither Scottish & Newcastle nor Carlsberg will be the same once the bitter bid battle raging over Britain’s biggest brewer is resolved. Either could emerge as a much-strengthened multinational beer baron; both could be doomed to playing bit-parts on the global market. It’s a game of high stakes.

Carlsberg teamed with Heineken to bid initially £6.8 billion net of debt at 720p per share for Scottish & Newcastle, an offer rejected as “unwelcome and derisory”. Subsequently the offer was raised to £7.1bn net of debt at 750p a share. That too was rejected almost instantaneously.

What makes this a vicious battle is the fact that for the past five years S&N and Carlsberg have been joint venture partners in Baltic Beverage Holdings (BBH), which has an 80%-plus shareholding in Baltica, Russia’s biggest brewer. BBH also has interests in much of the former Soviet Union.

BBH is the world’s 10th largest brewer and the biggest producer in Russia, the world’s third largest beer market, which is growing at breakneck pace. In the first nine months of this year Baltica’s volumes rose by a staggering 24.5%. The larger BBH generates about 40% of Carlsberg’s profits and about a third of S&N’s, proportions that will grow in importance as the Russian market continues to expand.

Controlling interest
BBH is at the heart of the battle. Neither group can afford to surrender its half holding. Carlsberg’s margins of less than 10% are among the lowest in the industry despite recent heavy bouts of cost cutting. Full ownership of BBH would transform that picture. For S&N, controlling BBH would cement its position outside western Europe, catapult it into fifth place in the world brewing league (in which economies of scale are crucial) and generate the cashflow to finance further acquisitions and joint ventures, notably in the Far East. The status quo ante is not an option for either side.

The BBH joint venture had been seen as the first step on the road to a merger of S&N and Carlsberg, but speculation about a bid from the Danish group for S&N was rife since Easter. What shocked the producer of Foster’s, John Smith’s and Kronenbourg was Carlsberg joining forces with Heineken to dismember it. A straight offer from Carlsberg would have met competition problems in the UK where S&N holds more than a quarter of the market. Heineken has only 1% of the UK market so the break-up plan sees the Dutch company taking the British business as well as S&N’s interests in western Europe, excluding France and Greece. Equally, had Heineken made a solo bid, the competition authorities in France and Russia would have taken a keen interest.

The lawyers are rubbing their hands because as part of the BBH joint venture both S&N and Carlsberg are subject to a “shoot-out” clause. Effectively this says that if one partner makes an offer for the other’s BBH stake, then the second can decide to trump that offer and take the bidder’s stake. S&N says the Carlsberg-Heineken bid has triggered this clause but Carlsberg rejects this interpretation. S&N has referred the matter to Swedish arbitration.  

Nor is division of the spoils clear cut if S&N’s shareholders opt for the money. One broker has calculated that its break-up value is about 740p, but Dresdner Kleinwork, the investment bank, has set a target price for victory of between 780p and 823p. Sources suggest that most of any further increased offer would have to come from Heineken, which is the much bigger – and richer – partner. It is valued at about £15.8bn, while Carlsberg is worth about £5.3bn.

That begs the question of how Heineken would carve a bigger piece of the cake to justify the extra investment. Neither it nor Carlsberg want to make a hostile offer unless they are forced to do so, because they want to see S&N’s books before deciding their final positions. In the present antagonistic climate, that seems a forlorn hope.

The picture gets even more complicated. The joint venture partners do not own the whole of BBH. The Finnish Hartwell family holds a 10.2% stake and may not welcome a cash bid, preferring to remain invested in the fast-growing Russian market. They will play an influential part in the outcome.

In addition, while Carlsberg would probably grab S&N’s interests in China, the world’s biggest beer market and one in which Heineken is already well represented, the Dutch brewer wants S&N’s Indian interests. Indian beer consumption grew by 27% last year and has huge potential, a fact not unnoticed by VJ Mallya, who owns the Kingfisher brand and whose United Breweries is a 37% partner in a joint venture with S&N. Mallya is thought to have pre-emption rights if ownership of the S&N stake changes hands and hardly wants his market opened to Heineken.  

Rival bids
There are other facets to this Rubik’s Cube of a puzzle. While experts believe that only Carlsberg and Heineken can optimise the cost savings from taking over S&N, in terms of making a quantum leap up the brewing league table “BBH is the only game in town”, according to one analyst. This is despite persistent rumours that Inbev, the Belgian/Brazilian giant, is gearing up for a tilt at the mighty Anheuser Busch, which has slipped into third place behind Inbev and SABMiller. All (notably Anheuser) are examining their options, including partnership with S&N.

The appeal of new joint ventures, however, is likely to have been tainted in Edinburgh by Carlsberg’s actions: why would S&N open itself to being targeted by an alternative partner a few years down the line?

In terms of a rival bid, while refusing to rule itself out of contention, SABMiller has its hands full bedding down its US partnership with Molson Coors and incorporating Grolsch, which it has just purchased for a heady £582m.

The message from Edinburgh is that S&N is determined to remain independent with burgeoning prospects based on control of BBH and consolidation of its interests in more than 50 countries. S&N reckons it has identified £20m of annual cost savings and is selling a large proportion of its loss-making French distribution business. In addition, it has accused Carlsberg of duplicity in refusing permission to release jointly agreed projections of BBH’s future. The implication is that were the figures public, shareholders would be eager to hang on to their holdings.

They may need more convincing evidence, however. After its trading statement, S&N’s shares stayed stubbornly at about 12p below the 750p revised bid price, suggesting that they may prefer to take the money. A white knight counter-bidder could yet ride to the Edinburgh group’s rescue but the credit crunch has hit takeover activity hard. S&N’s shareholders have only to consider the lesson of Sainsbury’s share price, which has slumped by 20% since the Qataris walked away from bidding. One analyst has put S&N’s value as it stands today at just 600p, compared with a market price of 515p before the bid rumours started to circulate and the 750p revised offer. Equally, on the same earnings multiple at which SABMiller landed Grolsch, one analyst has calculated that S&N could be worth 830p a share.

©  db December 2007