A hostile bid for Scottish & Newcastle
Sometimes it’s hard to tell who’s the good guys and who’s the bad guys. Carlsberg and Heineken have clubbed together to make an offer for Scottish & Newcastle (S&N), which the executive suite in Edinburgh has called highly unwelcome. Is S&N really fighting for survival or just trying to raise the offer?
It’s a sad, sad story. Readers, be honest. Is there anyone out there who still thinks that S&N has a future? Or has anyone ever believed that S&N was more than a profitable investment opportunity, to be sacrificed by its shareholders as soon as someone presented them with an offer they could not refuse?
The world had barely stomached the news of the Miller-Coors tie-up in the U.S. when the announcement hit the headlines that brewers Carlsberg and Heineken had formed a consortium to make an offer for the entire issued share capital
of S&N. The offer valued S&N GPB 6.8 billion, or about GBP 8.7 billion including debt.
At this early stage - whatever S&N thought of this was irrelevant to all the armchair strategists who now saw their chance to discuss the complex issue of who was going to get what once the great carve-up of S&N began.
Carlsberg did not leave the world in doubt for long over its intentions. A new acquisition vehicle would be set up, owned 54 percent by Carlsberg, and 46 percent by Heineken.
The business would then be split, with the Danish brewer taking S&N’s 50 per cent stake in Baltic Beverages Holding (BBH) and its operations in France, Greece and China. Heineken would assume its businesses in the UK (where Heineken has no brewing operations) and the Irish Republic, Portugal, Finland, Belgium, America and India.
The bidders claimed that their 720p-per-share offer was “significantly in excess of the standalone independent value of S&N”, representing a 36 percent multiple to the brewer’s 531p share price before speculation first surfaced at the end of March, it was reported.
However, S&N commented that the mooted 720p bid was only a small premium to the 640p at which its shares were trading shortly the offer was made in the last week of October. Sir Brian Stewart, S&N’s Chairman, even said: “This unsolicited and derisory proposal is an effort to get S&N’s unique portfolio of businesses on the cheap.”
In other words, S&N’s board decided to reject the offer.
Nevertheless, the markets continue to believe that S&N will be sold. An analyst was quoted as saying: “We have long argued that the appropriate value for S&N in a takeover scenario is 800p and we agree with the company that this offer falls well short. Nonetheless, we continue to believe an offer of circa 800p will be forthcoming.”
What makes the offer particularly insalubrious is the fate of BBH. S&N and Carlsberg have been partners in BBH since 2002. S&N claimed they had been content with the joint ownership arrangements in BBH.
However it will be remembered that one of the reasons that S&N could obtain the 50 percent stake in BBH was that the previous Finnish owners did not want to sell it to Carlsberg. Originally, BBH had been set up by Finnish, Swedish and Norwegian brewers. Carlsberg did not have anything to do with it. When, after a series of deals, which combined Swedish and Norwegian brewing interests, a 50 percent stake in BBH ended up with the Norwegian financial investor Orkla, the Finns knew they had to act, especially when Orkla formed a short-lived combination with Carlsberg. Suddenly, the Finns found themselves in bed with Carlsberg over BBH. But they did not feel comfortable. So instead of selling their 50 percent stake in BBH to Carlsberg, they sold it to S&N.
Carlsberg is believed to have been mulling ways to get full control of BBH for some time. But the proposed Carlsberg/Heineken offer has been widely criticised for being stingy. BBH has shown prolific growth in recent years, and now has 19 breweries in eastern Europe and central Asia.
In a surprise move S&N let it be know on 29 October 2007 that it was planning to buy out Carlsberg, its partner in Russian joint-venture BBH, for up to GBP 4.5 billion.
Funding from the deal would come from a rights issue and debt borrowed against future cash flow from BBH. It is understood that S&N could also sell a minority stake in the venture in the future.
As if to underline that the offer is serious, S&N, at the end of October, said it had also started arbitration proceedings in Sweden, where BBH is registered, over a possible breach by Carlsberg of the shareholders agreement covering BBH.
If these formal arbitration proceedings are confirmed, S&N say that will mean that Carlsberg will be legally obliged to offer its shares in BBH to S&N.
The BBH agreement is confidential and drafted under Swedish law and the process could take up to 12 months.
In the ensuing war of words, Jorgen Buhl Rasmussen, the new CEO of Carlsberg said: "S&N’s legal claims are spurious, without merit and a distraction to advancing discussions on the 720p proposal the consortium made to S&N on 25 October."
Commentators have called S&N’s move to buy out Carlsberg in BBH "a double-edged" sword. Unless S&N manages to get someone like SABMiller or Anheuser-Busch on board, it could end up losing the battle.
Why? Because the purchase of Carlsberg’s stake in BBH could require a massive rights issue by S&N to finance it. That could depress S&N’s share price quite apart from the likely fall in shares if the takeover bid fails. Moreover it was questioned if the rights issue would be supported by any hedge funds holding S&N’s shares.
However, S&N saw Sir Brian’s claims confirmed that Carlsberg was trying to buy BBH on the cheap when BBH released its latest third-quarter trading figures to end-September.
Third-quarter profits at BBH increased by 10.5 percent to EUR 274 million on a 28.3 percent rise in beer sales to EUR 878 million.
The strong sales growth in the three months to the end of September was driven by BBH’s hugely popular lager brand Baltika and underscores the value seen in the joint venture’s operations. BBH has a share of 37.7 percent of the Russian beer market. BBH’s Russia growth slowed during the quarter, but sales still increased by 9 per cent.
Analysts believe that the strong trading at BBH could put pressure on Carlsberg and consortium partner Heineken to raise their bid for S&N to over GBP 7 billion. Meanwhile, S&N has refused to enter into talks with the consortium over a possible friendly takeover bid. S&N Group Finance Director Ian McHoul was quoted as saying on 7 November 2007: "They made a highly-conditional proposal. We rejected it because it substantially undervalued the business. There is nothing to add and we have nothing to talk about [to the consortium]."
No one expects this to be S&N’s final word on the matter. And so the saga continues.
