Baltika buys Baku-Castel

Too late. Although Efes CEO Alejandro Jimenez made some ominous remarks at the Canadean Madrid conference in April that Efes was planning further acquisitions in the former Soviet Union states, Efes was beaten to the pole by its Russian rival Baltika when it came to clinching a deal with the French-owned Baku-Castel brewery in Azerbaijan.

On 15 May 2008 Baltika signed a contract with Brasseries Internationales Holdings (Eastern), a holding company of Groupe Castel, to purchase the Baku-Castel brewery for an undisclosed sum. The deal, which still requires approval from the anti-monopoly authorities of Azerbaijan, was made in a bid to develop Baltika’s business in the country.

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Until today, Baltika beer has to be imported into Azerbaijan. Baltika claims it has a 3.5 percent share of the local beer market in Azerbaijan and that is the leader of imported beer segment. Brauwelt has no idea how much beer is actually consumed in Azerbaijan. But since Efes some years back claimed it was selling about 30,000 hl there – which is about 10 percent of total consumption – Baltika cannot possible be the market leader with such a small market share.

Be it as it may, Baltika has grand plans for Baku-Castel, a brewery which was bought by the French Castel group in 2000. Around the same time Castel also bought breweries in neighbouring Georgia and Armenia, hoping to implement his well-proven African business model of running a quasi beer monopoly in the Caucasian region. Somehow Castel’s fortunes in the other two countries were mixed. Only Azerbaijan’s Baku-Castel has thrived over the years. This year the country’s sole brewer expects to produce about 300,000 hl.

It is yet unclear if Baku-Castel has pursued an exit strategy right from the start or whether the octogenarian Pierre Castel has decided to concentrate his efforts elsewhere. Brasseries Internationales Holding Ltd., a subsidiary of Groupe Castel, is a holding company and by its own account primarily engages in distribution of wine in Armenia, Azerbaijan, Georgia, and Russia. The company is based in Gibraltar. Over the years Brasseries Internationales Holding has had the European Bank for Reconstruction as a minority shareholder and since 2006 the Citigroup Venture Capital International as its majority shareholder. The CEO of Brasseries Internationales Holding is Jean Paul Lanfranchi, a confident of Mr Castel.

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"We were led to the decision to make this purchase by an optimistic estimate of the prospects for developing the market in Azerbaijan, by the favourable investment climate and the strong position of the Baku brewery and its brands on the market," said president of Baltika Anton Artemiev. The annual rate of growth of the beer market in Azerbaijan in the coming three years is 12 percent to 14 percent, Baltika forecasted. The company not only has plans to start producing its own brands there in time for the 2009 season, it also wants to bring production up to one million hl according to people familiar with the situation.

How they plan on achieving this feat remains a puzzle unless Baltika intends to send a lot of expats down to Baku. Azerbaijan may be oil rich but oil riches often prove more a curse than a blessing. There is no industry to speak of in Azerbaijan apart from oil. Unemployment is high. Hence the country suffers from an extreme shortage of talent. Skilled Azeris either work in the oil industry, in import-export or leave the country altogether in search of a better future. People who have worked in the brewing industry and might be susceptible to an offer from Baltika just do not exist.

Moreover, Baltika’s people may be in for a culture shock because Baku-Castel is still a smallish set-up compared to what they are familiar with. Also Baltika in the past has adopted a policy of hiring talent from other industries. Their inexperience with matters beer and brewing may prove beneficial to a large bureaucratic entity such as Baltika. But to run a real brewers’ brewery like Baku-Castel which was as lean as it can be – that’s another issue altogether.

Baltika brewery, which is 85.6 percent owned by Baltic Beverages Holding (which in turn is now 100 percent owned by Carlsberg) is a leader on the Russian beer market accounting for over 37 percent of the country’s beer output. It is also one of the leading European beer producers. The company owns 11 breweries in Russia and also holds licenses to produce French Kronenbourg 1664 beer, Danish Tuborg and Carlsberg and Australian Foster’s. In the past, its international expansion has been through Baltic Beverages Holding. Purchasing a brewery abroad is a first for Baltika. "Baltika has set up the production of licensed brands at its own breweries and has arranged for licensed production of its brands in Ukraine and in Great Britain. Now we will add to this experience practice in managing production abroad," said Mr Artemiev.

Baku-Castel – seen from afar. Photo: Brauwelt