Brewer takes their fancy

One contender seems to have got to the front of the queue of those eager to take over Scottish & Newcastle. Nigel Huddleston considers Carlsberg's chances
27 August, 2008
Page 30 
It's the drinks industry's longest-running story-that's-never-actually-happened. Britain's biggest brewer, Scottish & Newcastle, has been rumoured to be a takeover target for several years - for SAB Miller, Diageo, Heineken, a pre-Pernod Allied Domecq, and now Carlsberg.

Speculation about Carlsberg's intentions surfaced after the Danish brewing giant announced changes to its share structure in May that vastly increase its spending power for potential acquisitions.

The move sees a reduction in the minimum shareholding in the publicy-quoted Carlsberg held by the Carlsberg Foundation trust from 51 per cent to 25 per cent, allowing the brewer to strengthen its capital base through new share issues. A statement said the trust was "prepared to ensure the company can continue to seize value-creating opportunities that arise as a result of the ongoing consolidation of the global beer industry."

Carlsberg quickly insisted that no immediate offer for S&N is on the cards, but there would clearly be some synergy between the two businesses, and Carlsberg will be capable of a counter-bid should another major international player come in with a firm offer for S&N.

Prior to the Carlsberg share restructure, the talk was of a joint bid for S&N by Diageo and SAB Miller, though since then talk has been more about Diageo getting out of beer rather than deeper into it.

Carlsberg's declared global aim is to be the number one player in every market it plays in and analysts have suggested it could raise an extra £4 billion by issuing new stock, though this could still leave it short of the suggested asking price of £8 billion quoted in some sources for S&N.

A cheaper alternative would be for Carlsberg to attempt a buyout of BBH, its market-leading joint venture with S&N in Russia and the Baltic states. A clause in the JV contract allows either party to trump the other with a better offer if a buyout bid is made. This would leave Carlsberg's own stake in BBH vulnerable if S&N as a whole were to fall into the hands of another global player such as SAB Miller.

Russia is the fifth largest beer market in the world and BBH management ha s already set its sights on usurping Heineken as the biggest beer brand in Europe, making the stake in BBH and its main Baltika brand an attractive chunk of any S&N deal for serious global players.

For Carlsberg, BBH would be a comfortable strategic fit with Germany and the larger Scandinavian beer markets, where it is already the market leader.

S&N's market leadership in the UK and France would hold similar attractions for Carlsberg and the two company's portfolios are more complementary than conflicting.

As well as its European strengths, Carlsberg holds the number two position in Malaysia and Singapore and claims to be the biggest brewer in western China.

S&N is the second biggest brewer in Belgium and Greece and has a half share in United Breweries, the biggest producer in India, where Carlsberg has been trying to build its brewing platform.

The main scrutiny from the regulators could come in S&N's domestic market, where it brews top-three beer brand Foster's under licence in direct competition with Carlsberg's main pilsner. The Australian Foster's Group would probably want out of any partnership where it could quickly become the junior brand and look elsewhere, feasibly even setting up its own UK brewing operation as Anheuser-Busch and Carlsberg itself have done . A combined Carlsberg-S&N would be top heavy with UK brewing capacity , and would feasibly offload any o f the S&N plants at Gateshead, Reading and Tadcaster, or its own at Northampton.

Regulators could also force the sell-off of the Tetley's ale brand, with S&N's UK market leader John Smith's a more attractive proposition for Carlsberg to keep. But John Smith's long-term future could be shaky under Carlsberg - S&N alone among the leading British brewers has invested in its ale brand, while Carlsberg has switched focus from Tetleys to its own lagers.

There could also be competition issues in Portugal and Finland, both markets in which Carlsberg is the biggest player, with S&N in number two spot.

Carlsberg may not be ready to bid for S &N immediately, but it is clearly getting into position should the right time come - and that could force other potential suitors out of the woodwork. It's one takeover story that won't be going away any time soon. Probably.

Comment

Christian Davis

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