BBH: the jewel in the crown

If Baltic Beverages Holding gets its way, Russia will one day become as legendary for beer as it is for vodka. Chris Mercer reports on Carlsberg's strategic acquisition

27 August, 2008
Page 24 
Carlsberg could not hide its delight in announcing an agreement to buy BBH - sorry, make that Scottish & Newcastle - recently.

Spurred on by success in 2007, the Danish brewer is now looking to expand BBH in both its eastern Europe homeland and further afield.

The importance of BBH to Carlsberg - and to S&N shareholders - is evidenced by the small rainforest's worth of paper used by the journalists, analysts and investors to explain the potential of these prized eastern European beer markets.

BBH eclipsed everything else in the S&N takeover tussle, including the benefits to Carlsberg's bidding partner, Heineken. The deal would see the UK's last national brewer S&N carved up, yet the future of BBH, S&N's 50-50 joint venture with Carlsberg, was all anyone really wanted to write about.

BBH sold more beer across its markets last year (29 million hl) than Carlsberg sold in western Europe, the Danish brewer reported in its recent full-year results.

This trend was one of the main reasons behind Carlsberg's 2005 announcement that it would shut about half of its European breweries within a decade.

In Russia, BBH's flagship Baltika brand now claims a 37.6 per cent share of the beer market, while the venture again grew volumes in developing markets such as Kazakhstan and Ukraine in 2007.

No wonder Carlsberg chief executive Jorgen Buhl Rasmussen called the takeover of S&N "transformational".

BBH got in to Russia at a good time. When it bought Baltika in 1993, the country's fledgling government was busy sweeping up the lingering fragments of communism, to clear space for McDonald's outlets and western-style consumerism. Beer was classified as a soft drink and positively promoted as a less harmful alternative to vodka. Even an economic collapse in the late 90s could not stop Russia becoming the world's fifth -largest beer market.

Baltika rapidly expanded distribution and production, and now has what several analysts believe is an unassailable position. Not bad in a market where consumers' thirst for beer continues to astound the experts.

Carlsberg reported beer market growth of an "extraordinary" 23 per cent in Russia during the first half of 2007. Full-year market volumes rose 16 per cent. But hang on a minute, wasn't the Russian beer boom supposed to be over?

Despite unexpected success last year, Carlsberg stuck to this line in its recent results conference. It estimated that Russian beer market growth will decline from 5 to 3 per cent between 2008 and 2010. This estimate, the brewer said, was "in light of increases in excise duty, price increases and continued restrictions on advertising, as well as exceptionally warm weather at the beginning of 2007".

Many analysts broadly agree there will be a slowdown as Russia enters a new growth phase. Pressure on margins is likely to grow as rising costs for raw materials and energy show no sign of abating. This makes profitability and raising value much bigger issues for BBH and its rivals.

For all their growth, emerging markets in eastern Europe remain some way behind their western counterparts when it comes to value.

BBH revenue was DKK10.4 billion (US$2.1 billion) in 2007, compared to DKK27.5 billion ($5.6 billion) for Carlsberg in western Europe, even though BBH sold more beer. Moves to improve value are being made. BBH's operating profit rose 30 per cent in 2007, following price increases and cost controls imposed by Carlsberg and S&N.

Rising wages have also boosted the country's premium beer sector. Carlsberg will attempt to capitalise on this by expanding key brands in BBH markets.

Another way of raising value through BBH is to spin globalisation on its head by harnessing a trend for imported beers in mature markets. Carlsberg and BBH's leadership have each indicated they would like to bolster Baltika's international credentials in this sector.

The brand's notoriety is already growing. Russia's beer union dubbed 2007 "the year of Baltika", following the brand's high-profile expansion in the UK and launches in several other countries . Overall, Baltika increased export sales by 23 per cent to 2 million hl during the year. BBH has also recently investigated launching in China, another goldmine for big brewers.

Move over Stolichnaya and the rest, beer is the drink of modern Russia.
----=== BBH Breweries ===Russia 10

Baltics 4

Ukraine 3

Kazakhstan 1---- === BBH predicted performance ===Year ended 31 December 2008 2009 2010

Russia

Beer market volume growth 5.0% 4.0% 3.0%

Total BBH

Beer volume (million hl) 60.4 64.6 68.8

EBITDA (E million) 950 1,100 1,250

EBIT (E million) 740 865 990

Capital expenditure (E million) 460 385 330

The table sets out the financial projections for 100 per cent of BBH



Comment

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