Heineken and Carlsberg to break up Scottish & Newcastle

Jean-Francois van Boxmeer, Heineken’s CEO, hopes to become Britain’s biggest brewer after teaming up with Carlsberg to launch a recommended bid for Scottish & Newcastle (S&N) worth more than EUR 10 billion.

Was Heineken’s partnering with Carlsberg to take over S&N just the test run for a new European brewing giant? It seems like it. Or why should anybody really want to become Britain’s major brewer? By all accounts, this is a dubious accolade. There is just no money to be made in brewing in Britain.

To repeat, why should Heineken invest billions of Euros into the bits of S&N that Carlsberg does not want, unless … well unless Jean-Francois van Boxmeer has an ulterior motive? Moreover, why on earth should Heineken risk the wrath of investors (see the development of Heineken’s share price over the past few months below) if it did not pursue larger designs?

Heineken, Carlsberg, Efes – what is happening right now under our eyes is the slow emergence of a large brewing concern, which would not be a distant third to InBev and Anheuser-Bush should the two brewers merge eventually.

The possibility of InBev and Anheuser-Busch combining their operations has intrigued the financial markets for years. Not least the investment banks which would make a killing on fees alone if such a deal came off. Much as such a deal has tickled investors’ fancy, it has frightened the “also-rans” in the global brewers’ ranking. Let’s put it this way: What will become of brewers like Heineken and Carlsberg once InBev/Anheuser-Busch at a combined volume of 400 million hl and a combined turnover of USD 32 billion have created a category of their own, unreachable for the rest?

That is probably the reason why Heineken has engaged with Carlsberg to take over S&N – before anybody else does it.

The world’s largest brewers (2006)

Source: F.A.Z., Frankfurt

The 800 pence-a-share bid, announced to the London Stock Exchange on Friday 25 January 2008, will bring down the curtain on 259 years of independence for S&N, which is to be carved up by its continental suitors within 12 months.

Isn’t it ironic that the same forces that brought down Allied Domecq a few years ago brought down S&N? It will be remembered that a consortium of Pernod Ricard and Fortune Brands broke up Allied Domecq, the world’s number two drinks group, in 2005.

Why did this happen? The answer is short and simple. Because it could happen. That’s what being a listed company is all about. You live for as long as your shareholders let you.

In the drinks industry, investors were desperate for a deal. And Allied Domecq proved an easy target. Same with S&N. Like Allied Domecq, S&N does not have a strong backer. Heineken has a family behind it, Carlsberg a foundation. Not so S&N. Its shareholders were only in it for the money. S&N did not make any big mistakes or messed up big. Ok, you may argue that S&N’s management had been foolish enough to buy France’s Kronenbourg brewery from Danone. Many questioned S&N’s sanity of mind then. Why invest in France? On the plus side, S&N got involved with Baltic Beverages Holding (BBH), which must have proven a very nice money-spinner over the years. So at the end of the day, S&N cannot be blamed for any major blunders. Its only fault was that it was listed and thus made for an ideal target. Tough.

You have to give it to S&N’s board that they have made the best of a bad situation. They knew that they had no chance, that their investors had already made up their minds that S&N was to be slaughtered. Yet they pulled themselves together and put up a fight for the highest price. And succeeded. According to the British media, Sir Brian Stewart, S&N’s Chairman, and the rest of the board will have their involuntary departure sweetened by the fact that for their combined 1 percent stake in S&N they will receive a total of GBP 76 million.

S&N’s board, after months of resistance, has finally agreed to an offer of 800 pence per share by Heineken and Carlsberg. Theoretically, even at this stage a counter-bid from the likes of Anheuser-Busch or SABMiller remains a possibility. Yet it is believed widely that the price being paid by the bidding consortium, which is 80 pence more than its first offer in October last year, is unlikely to be topped.

In the event of a rival bid, Carlsberg and Heineken would receive a break fee of GBP 780 million, or 1 percent of S&N’s equity value.

Due diligence is understood to have thrown up a query over the allocation of profits between S&N’s operations in France, which will be swallowed by Carlsberg, and the UK, which Heineken is buying. Profits from France are understood to have been worse than expected.

Under the proposed deal, Carlsberg is expected to fund the majority of the deal (about 56 percent of the purchase), while Heineken would pay 44 percent.

The Danish brewer is planning a DKK 31.5 billion (EUR 4.2 billion) rights issue. Heineken has secured debt finance from a consortium of banks.

As said, S&N, which traces its roots to 1749, when the William Younger Brewery was established in Leith, Edinburgh, will be broken up, with Heineken taking its UK business, including the John Smith’s, Foster’s and Strongbow brands.

Heineken will take on operations in Ireland, Portugal, Finland and Belgium, together with S&N’s Indian joint venture and its U.S. export business, which principally involves the Newcastle Brown Ale brand.

Carlsberg will take S&N’s struggling Brasseries Kronenbourg unit in France, together with its Greek, Vietnamese and Chinese interests and its highly profitable 50 percent stake in BBH.

One of the reasons Carlsberg will have to fork out more than Heineken is that it gets the other half of BBH that it does not own yet. BBH’s Baltika brand, which dominates the Russian market, is one of the world’s fastest-growing lager brands.

BBH’s beer volumes will rise from 60.4 million hl in 2008 to 68.8 million hl in 2010, with EBITDA rising from EUR 950 million to EUR 1.25 billion, it was reported.

Carlsberg estimated the value of the assets it is acquiring at EUR 7.8 billion.

Heineken said that the deal would provide it with "undisputed leadership in Europe". It said that it was assuming ownership of S&N assets worth about EUR 6 billion.

The move by Heineken into the UK is unlikely to attract the attention of the Competition Commission as it is still rebuilding its market position after killing its standard-strength Heineken Cold Filtered lager in 2003 in favour of the premium strength Heineken that it sells throughout the rest of the world.

The 800 pence-bid values S&N at about GBP 7.8 billion, or EUR 13.5 billion after the assumption of debt and pension liabilities.

There is a bitter irony to the end of S&N. With Carlsberg acquiring the other half of BBH, the Finnish founders of BBH, the Hartwall family, will have to acknowledge defeat. By selling their 50 percent in BBH to S&N in 2002 for EUR 2 billion, they had hoped to keep it save from Carlsberg’s reach. That was a vain hope.

The takeover will be effected by means of a scheme of arrangement and completion is expected to take place in April.