The Ukraine crisis, Russia and brewer Carlsberg

Has Carlsberg become a risky investment? Shares in Carlsberg dropped 4.3 percent on 3 March 2014 after investors deserted the Danish brewer due to its exposure to the Russian market as the Ukraine crisis escalated, media reported.

In Russia, Carlsberg is the number one brewer with a market share of 38 percent. In the Ukraine it ranks number two with an alleged market share of 27 percent. In 2013 beer consumption in both countries declined by about 8 percent.

That ’s why Carlsberg has been looking to Asia for growth of late, after depending heavily on Russian beer drinkers for a substantial portion of its profit for years. But due to tough regulatory changes and deteriorating economic conditions, sales in Russia have been weak for some time now.

Carlsberg bought the 50 percent it didn ’t already own in Baltika Breweries, the market leader in Russia, as part of a deal with Heineken of the Netherlands to take over and split up Scottish & Newcastle in 2008.

Immediately, eastern Europe became Carlsberg ’s major profit spinner. In 2009 the market zone contributed 52 percent to Carlsberg ’s profits (EBIT). However, by 2013 it was down to only 36 percent.

That seems to have got analysts worried. In late February 2014 bankers at J.P. Morgan Cazenove downgraded their investment stance on Carlsberg to “Underweight”, the equivalent of a sell rating, from “Neutral”.

“We would remind investors of the significant profit volatility Carlsberg has experienced previously in Russia. Moreover, we believe acquisition risk, at the expense of existing shareholders, in Asia remains,” J.P. Morgan Cazenove analysts were quoted as saying.

Investors have been warned.