Independent directors – aren´t they a pain in the neck?
Why does Danish brewer Carlsberg plan to spend up to USD 1.2 billion to buy the 15 percent of Russia's Baltika brewery that it does not already own? Anybody in a rush? And why did it promise to pay so much (the maximum 1,550 rubles/USD 52 per share represent a 25 percent premium on the current stock price), although everyone and his dog know that the Russian beer market spells trouble?
Beer consumption dropped 10 million hl between 2007 and 2010 as Russia was hit by the global economic crisis and a crisis of its own making, the 200 percent tax increase on beer in 2010. Last year volumes declined another 3 percent. And the outlook isn't all that good as more restrictions on the sale of beer will come into effect in 2013.
Call it unfortunate timing that Carlsberg's announcement on 20 February 2012 to buy out Baltika's shareholders came when the Danish brewer reported a drop in full-year profits, due to weakness in its eastern European operations, aka Russia.
Carlsberg is dependent upon Baltika performing well. In 2011, Baltika contributed about 40 percent to Carlsberg’s beer volume sales and 45 percent to its EBIT. Before the crises hit, Baltika's EBIT contribution stood at 52 percent in 2009.
Compounding Carlsberg's problems, Baltika's market share in Russia has fallen 2.5 percentage points to about 37 percent since 2008. Hardly surprising, last year Baltika's CEO was forced to fall into his sword and remove himself to Baltika's supervisory board.
Carlsberg has since said it would delist Baltika irrespective of its voluntary buy-out offer. Obviously, delisting will allow the company to cut administrative costs related to the circulation of shares on the stock exchange, Russian media reported.
That's a trifling matter. More important is what Carlsberg had to say on the buy-out, whenever it occurs. The company said that buying the 15 percent of Russia’s largest brewer would be “immediately earnings-enhancing” and give the group “greater operational flexibility”.
The company said further: “By having 100 percent ownership of Baltika, the company can be fully integrated into the Carlsberg Group, which will speed up the implementation of decisions and also make Baltika a vital part of the integration which the group has accelerated recently.”
In other words, although the Danes bought out their erstwhile partner in Baltika, Scottish & Newcastle, in 2008, they still have not managed to get the Russian operation fully under their control.
It was as many had always suspected: being the Carlsberg Group's major unit, Baltika's management did as they seemed fit, displaying an independence of mind and otherwise that must have rankled with many of Carlsberg's managers, not just the Danish.
The same could be said for Baltika's two independent directors. Another consequence of the Baltika buyout would be that Carlsberg will not have to seek the nod of approval of Baltika’s independent directors on key decisions.
Carlsberg has stated its intention to make a voluntary offer in May this year, but there is no certainty such an offer will be made. Already on 4 April 2012 Carlsberg took the necessary steps to arrange for a delisting of Baltika. This can take up to three months, after which trading in Baltika’s shares will cease.
The total number of Baltika's shareholders as of 30 December 2011 is 2,631. This includes 24 legal entities, 7 of which are nominal holders, and 2,337 individuals. They will be watching it all closely.
