Sir Brian Stewart had stepped off a plane at Heathrow last Wednesday morning
when his mobile phone rang. It was just before midday, and a storm was about
to be unleashed.
The boss of Heineken, Jean François van Boxmeer, was on the line. He had
called to warn the chairman of Scottish & New-castle (S&N),
Britain’s biggest brewer and the company behind John Smith’s and Foster’s,
that an announcement would shortly be made to the stock market about S&N.
The Dutch beermaker was in talks with its Danish rival Carlsberg about a
potential joint £7 billion takeover bid for S&N. Despite their best
efforts to keep it quiet, the Takeover Panel had rumbled the plans and
wanted a statement.
Stewart hung up. The phone rang again. This time the caller was the chief
executive of Carlsberg. He wanted to tell the S&N chairman the same
thing.
The news didn’t completely surprise Stewart, but he was decidedly
disappointed. S&N had worked with Carlsberg for five years on BBH, their
50-50 joint venture in Russia and the Baltics, and had built up a close
relationship. Now, he thought, the Danes were preparing to throw all that
away.
A few minutes after the two phone calls, the continental beermakers issued
their statement and Stewart and his company were abruptly thrown into a
takeover battle.
The timing was bad. Tony Froggatt, chief executive since 2003, was preparing
to hand over the reins to his younger colleague John Dunsmore.
S&N, the fifth-biggest brewer in the world, is a highly prized asset and
has long been seen as a takeover target. If the Dutch and Danes succeed with
their audacious bid, the landscape of the global drinks industry will be
transformed.
Many expect Carlsberg and Heineken to launch a formal offer within two weeks,
valuing S&N at about £7.5 billion. It will be fiercely resisted by the
board of the Scottish brewer, which branded the interest “unsolicited and
unwelcome”.
Despite Carlsberg’s and Heineken’s insistence that they want to pursue a
“friendly” deal, their approach is viewed as anything but in Edinburgh, S&N’s
home town.
John Nicolson, S&N’s managing director for Eastern Europe, Asia and the
US, said: “They can protest that they were going to come with a friendly
deal but, where I come from, three in a bed does not work.
“The vehicle through which we could have had a discussion [BBH] is there. It
would have been easy. It’s more difficult for [Carlsberg] to keep quiet, to
produce a partner and claim to be friendly.”
The reaction from S&N has not made for an ideal start for the consortium,
which has been working seriously on its plans for only a few weeks and was
forced to reveal its intentions earlier than it would have liked.
Using colour-themed code-names in internal documents to hide their tracks –
“Blue” for S&N, “Orange” for Heineken and “Red” for
Carlsberg – the pair worked out some vital aspects of the takeover deal,
such as how they planned to divide up S&N’s assets – but many details
remained to be sorted out.
Despite the antipathy from Edinburgh, the market warmed to the proposed deal.
Recent news that SAB Miller and Molson-Coors were to combine their American
operations had got traders thinking about consolidation in the global beer
industry, and this looked like being the next step.
Shares in S&N had jumped 5% on Wednesday morning as rumours of a possible
deal spread, before Carlsberg and Heineken were forced into the open. The
price soared on the official news. By the close of trading, the shares
reached 756p, a 19% gain on the day. That valued the company at £7.2
billion. The market expects a deal. WHEN S&N bought the Finnish brewer
Hartwall in 2002, the deal was hardly hailed as a world beater. However, a
few analysts spotted that the 50% stake in BBH that came with the business
made it a potentially lucrative transaction.
Russians are traditionally vodka drinkers, but they were beginning to develop
a taste for lager. Annual consumption of beer in Russia has grown from 20
litres per head in 1990 to about 80 litres today.
Over the past five years, BBH, which owns majority stakes in brewing companies
in several Baltic states as well as 91% of Baltika, Russia’s biggest
beermaker, has become central to the fortunes of S&N and Carlsberg.
BBH now accounts for almost half of Carlsberg’s operating profit and almost a
third of S&N’s profits.
BBH is the engine of growth for the two companies, whose home markets are
static. The Russian beer market grew 23% in the first half of the financial
year, while Baltika boosted its volumes by 31%.
“The future opportunity is as huge as the growth we have had in the past few
years,” said Nicolson.
For the past year, Carlsberg has been itching to seize full control of the
operation. One source close to the Danish brewer said: “The working
relationship with S&N is fine, but as with any joint venture, there are
always situations where you can’t unlock as many synergies as you would
like. If they own it 100%, they can advance the business to their own
agenda.”
Offering to buy out S&N’s stake in BBH might be a simpler – and cheaper –
way to gain control of the business than launching a full takeover bid. But
the situation is complicated by a so-called “shotgun” clause in the joint
venture. This allows whichever party receives an offer for its stake to make
an offer of its own for the business at the same price. This has so far
deterred either S&N or Carlsberg from attempting to buy the other out.
Buying the whole of S&N presents a way round this conundrum.
But there are other complications. Competition issues – notably in Britain –
prevent Carlsberg from buying S&N outright. To get round this, it needed
a partner. Heineken was the first choice.
The Dutch and Danish brewers are not natural bedfellows, but in the words of
one person working on the deal: “It suits both parties quite nicely; it’s a
means to an end.”
A deal would give Heineken market-leading status in the UK at a stroke. It has
struggled in Britain after ending a contract to brew Heineken under licence
in 2003. It opted instead to begin exporting beer to the UK, but has taken
only 1% of the market.
Clearly, the chance to gain such a strong position in one go was too good to
refuse.
“A deal would give Heineken a production facility in the UK, something it is
sorely missing,” said Kevin Baker, director of alcoholic beverages at
Cana-dean, a research firm. S&N has been rehearsing its defence strategy
since the spring, when the takeover rumours began to hot up.
Although no offer has yet been made, the board fears a bid will undervalue
BBH, its crown jewel.
Nicolson said: “Carlsberg is trying to get this on the cheap. It knows the
value of BBH, we know the value of BBH. We have just finished our three-year
planning process for the business.”
The struggle, admitted Nicolson, will be persuading S&N’s investors.
“We’ve had a problem convincing our shareholders of the potential value in
BBH,” he said.
None of this has cut much ice with the bid partners. A source close to them
dismissed the idea that there should be an expectation of friendliness.
“They are partners in Russia but competitors elsewhere – in Britain, for
example. We are talking about business here, after all. And when the
Takeover Panel tells you to put out a statement, you don’t have a choice.”
Another insider said: “People understand the BBH business better than some
think they do. It is well followed and gives its results out regularly.”
The future of S&N may ultimately prove to be about price. Consortium
insiders point out that before the speculation took off in March, shares in
the British company were trading at about 530p. The bidders are expected to
pitch any offer at between 720p and 750p.
This is unlikely to wash with shareholders. One said: “Anything with less than
an ‘8’ in front of it is not going to be sufficient compensation for giving
up a 50% stake in BBH.” A bid battle is unlikely. Alex-andra Oldroyd, an
analyst at Morgan Stanley, wrote in a research note last week: “The risk for
any alternative bidder is high.” Despite this, the company expects all its
rivals will be eval-uating whether to join in. Whatever else happens in the
next few days, Stewart’s mobile phone is likely to stay red hot.
RUSH FOR NEW MARKETS
AS the pace of consolidation in the world beer market hots up, the leading
brewers have been keen to acquire operations in emerging markets.
There are few corners of the globe where the industry’s giants have not
snapped up local players. In the past five years, there has been deal
activity in countries as far apart as Egypt, Brazil, Mexico and Tibet.
Many of the big beer companies are facing slowing or flat growth in their home
markets, and are therefore looking for other ways to expand their
businesses. Some of the countries they have expanded into – India and some
South American nations are prime examples – may not have a beer-drinking
culture. But the brewers think that they can change consumer tastes and
create new markets.
China, where there is a culture of beer drinking, represents the biggest
opportunity among the emerging markets. Anheuser-Busch, Heineken, InBev and
SAB Miller have all paid considerable sums to acquire assets there.
One of the other more notable deals of the past few years was SAB Miller’s
acquisition of Bavaria, which dominates in Colombia, Peru and Ecuador.
