Brewers Carlsberg, Heineken gang up against Scottish & Newcastle; S&N taking evasive action

21 October 2007

A desperate S&N may sell its Russian Baltika operations to save itself; or it may seek an alliance with bigger rivals to repel a combined Danish-Dutch offensive, writes Kiron Kasbekar.

Scottish and Newcastle, the Edinburgh-based British brewer, may sell its Finnish holding company to thwart a likely joint bid from rival beer-makers Denmark''s Carlsberg and the Netherlands'' Heineken.

On 17 October 2007, the two raiders made known their intention to join hands to acquire S&N. Their plan assumes that Carlsberg would take over S&N''s interest in Russia-based brewer Baltic Beverages Holding (a 50:50 joint venture between S&N and Carlsberg) and its operations in France and Greece. Heineken would take over the rest of S&N''s European operations. The likely cost of acquisition: around $15 billion.

S&N, which is known for brands such as Foster''s, Kronenbourg and Baltika, has responded with a statement that the proposed joint bid was "unsolicited and unwelcome". Or, in one word, hostile. It wants to remain an independent entity, and has advised its shareholders to ignore the hostile bid.

It seems to be yet another instance of a joint venture partner wanting to buy out the other partner - except here the aggressor (Carlsberg) has to cast its net wider than is usually the case. BBH owns Baltika, the biggest brewer in Russia, which is the third largest beer market in the world. Carlsberg, it seems, has been eager to buy S&N''s stake in the highly attractive BBH; but its joint venture agreement is coming in the way.

Under a "shoot-out" clause in the agreement, if one partner declines to take up the other partner''s offer to sell its 50 per cent stake in the joint venture at a set price, the first partner is entitled to buy the other partner out at the same price. So if Carlsberg pushes S&N too hard on BBH, it could end up losing the venture. It''s simpler for Carlsberg to make a grab for S&N instead. But, given the Danish group''s size, it couldn''t do that on its own. So it chose Heineken as a partner.

It is not clear what would happen to S&N''s operations in Asia, including China and India. In India, S&N owns a 37.5 per cent stake in United Breweries, in which Vijay Mallya and his associates own a similar stake. But India accounts for a tiny fraction of global beer sales. China, on the other hand, is much bigger and growing faster. In 2002 it overtook the US in beer consumption to become the biggest beer market in the world. (See table below.)