Scottish & Newcastle (S&N) is preparing to mount a vigorous bid defence after Carlsberg and Heineken announced that they were formulating a break-up that could value Britain’s biggest brewer at up to £10 billion (see Commentary, facing page).

The FTSE 100 company, which has long been tipped as a bid target, dismissed the proposed break-up as “unsolicited and unwelcome” and urged shareholders to take no action. Analysts cited SABMiller and Anheuser-Busch, the American owner of Budweiser, as possible counter-bidders.

Heineken and Carlsberg had earlier confirmed that they were in talks about making a joint offer for the John Smith’s and Kronenbourg brewer with a view to splitting its operations between them. City sources said the plans were well advanced and a formal approach could be made as early as next week.

Shares in S&N gained almost 19 per cent, adding 119½p to 756p. That values the company at £7.15 billion, or about £9 billion including debt.

In a swift riposte, S&N rebuffed the advances, insisting it was “confident in its future as an independent group with a combination of strong growth in emerging markets and cash generation in developed markets”.

A source close to S&N expressed astonishment that Carlsberg had not made contact before issuing the statement, and added: “The idea that this is friendly is, frankly, barking. I can’t think of anything more unfriendly, coming as this did from a key partner with whom we are in contact on an almost daily basis.”

Analysts said that a bid would have to be worth 800p or more a share, valuing S&N at up to £10 billion, but sources said that the initial offer was likely to be around 750p. A source close to the two brewers noted that the “undisturbed share price” – before bid rumours first arose at the end of March – was about 530p. The source expressed surprise at the swiftness of S&N’s rejection.

The statement, put out in response to a rise in S&N’s share price, said that Heineken and Carlsberg were “in discussions regarding the formation of a consortium to make an offer” for S&N.

Under the proposal, Heineken would acquire S&N’s UK business and some European operations, notably in Finland and Portugal, while Carlsberg would take its interests in France and Greece as well as its 50 per cent stake in Baltic Beverages Holding (BBH).

The proposed carve-up would circumvent any potential competition issues in the UK as Heineken withdrew from the mainstream lager market four years ago. The Dutch company now sells much smaller volumes of its premium-strength Heineken core brand and Amstel lager.

Taking on S&N UK would provide much wider distribution for its own brands as well as giving it a wide portfolio of new brands, including Strongbow and Bulmers ciders.

For Carlsberg, the key to the deal is BBH, which owns Russia’s best-selling

Baltika brand. It already owns the other 50 per cent in a joint venture with S&N and most observers believe that the principal reason for its move on S&N is to gain outright control.

The Danish brewer could simply make an offer for S&N’s BBH stake, but it could risk losing it altogether under a so-called “shotgun” clause in the joint venture. This would allow S&N to match the offer, forcing Carlsberg to sell out.

Rumours of bid interest have swirled around the Newcastle Brown brewer for at least six months, with both Heineken and Carlsberg being mentioned as potential suitors. However, until now neither company has been forced to make a statement.

The confirmation of their interest follows a difficult few months for S&N, badly hit in its core UK and French divisions by poor summer weather. In Britain, the weather has exacerbated the impact of the smoking ban and the continuing decline of beer consumption. It also comes just two weeks before Tony Froggatt is due to hand over as S&N chief executive to John Dunsmore, the recently promoted head of its Western Europe operation. The elevation of Mr Dunsmore, who has been openly critical of Carlsberg’s performance in Britain, had been seen as an attempt to bolster S&N’s defences against possible bids.

The brief statement makes no mention of S&N’s operations in Asia, where it has minority stakes in Chongqing Breweries in China and India’s United Breweries (UB). Analysts believe that Heineken is best placed to take them on through its Asia Pacific Breweries venture, although Vijay Mallya, who controls UB, is thought to have preemptive rights over the 40 per cent stake.

Speculation that Carlsberg would seek a deal with S&N has increased since the charitable foundation that controls the Danish group said in April that it was changing its charter to allow it to make acquisitions. It is understood that Carlsberg held informal discussions with Heineken shortly afterwards and the talks had gradually become more serious.

It is believed that the delay in drafting a proposal has had nothing to do with the credit crunch, as both companies are rated as investment grade. “The long timespan has been more to do with the complexities involved with organising the logistics of such a takeover,” a source said.

Lehman is advising Carlsberg. Credit Suisse is acting for Heineken. S&N’s advisers are Deutsche Bank and UBS.

Main UK brands

Newcastle Brown Ale - the number one selling premium bottled ale
Foster’s –the second biggest selling lager, more than 1.5m pints sold daily
John Smith’s – the number one ale brand, over 1m pints sold daily
Kronenbourg 1664 - the number two premium lager
Strongbow - cider market leader with a 60% market share

Group facts

Interest in more than 50 breweries internationally, 15,000 employees and a further 22,000 in the joint ventures Market leader in the UK, France, Russia, Baltic Countries, Kazakhstan and India

The suitors
Heineken: Heineken, Amstel, “33” Export, Pelforth, St Omer, Murphy’s, Fürstenberg
Carlsberg: Carlsberg, Holsten, Okacim, Tuborg, Pripps

Times Recommends

• Food prices rise 8.3% on soaring fish and meat
• Car sales crash as economy hits skids
• House prices fall but Bank leaves rates on hold