How much longer, Scottish & Newcastle?

Ok, so we have not had a major deal in the brewing industry for a while. But will it really be SABMiller and Diageo, as rumour has it, who will break up Scottish & Newcastle?

Hands up – which was the last big deal in the brewing industry that you can remember? Quick, say it out loud … it was probably SABMiller buying Columbia’s Bavaria in …. Well, ages ago. If you must know that was in 2005 and SABMiller forked out USD 8 billion.

What has made investors’ hearts beat faster since have been, you’ve guessed it, rumours. Rumours of deals in the offing. The latest juicy rumour was probably InBev’s takeover of Anheuser-Busch.

Alas, rumours do not get the analysts all that excited. Moreover, they do not pay for their expensive office suites in the City of London. They need a deal. A fee-paying deal.

So you can imagine the excitement among London’s business journalists when reports were leaked to them at the end of April that SABMiller and spirits giant Diageo had been in secret talks with the intention of breaking up Scottish & Newcastle (S&N).

The whole thing reminds us of the sordid affair several years ago when documents fell into the wrong hands which described a takeover scheme by Interbrew. The then target was – does anyone remember – SAB! In those days there was a lot of huffing and puffing because an offended Graham Mackay expected a public apology by the then Interbrew CEO Hugo Powell. Which he got.

And today? It’s “no comments”.

As far as the secret informer was concerned, SABMiller’s roadmap seemed to have been finalised. In theory at least. According to the Financial Times, SABMiller would buy S&N for about 710p a share, which values S&N at just over GBP 9 billion or USD 18 billion, including debt. Next SABMiller would sell S&N’s UK beer business to Diageo, which includes the brands Foster’s, John Smith’s and Strongbow cider, as well as Newcastle Brown Ale. Diageo was supposed to pay GBP 3 billion for them. S&N’s Kronenbourg interests in France would be sold off to a private equity consortium which would probably laden Kronenbourg with GBP 1 billion of debt to finance the acquisition.

All of this would leave SABMiller with S&N’s other international assets, such as a big stake in the Indian brewer United Breweries, in the Chinese brewer Chongqing, and, more importantly, with a 50 percent stake in Baltic Beverages Holding (BBH), whose Russian brewery Baltika controls about a third of the Russian beer market.

The Financial Times went as far as to speculate why SABMiller’s move on S&N had been disrupted. It was S&N’s share price, it was argued, which has risen to more than 600p in recent months.

Needless to say that all parties involved have denied any such plans. Malcolm Wyman, SAB’s Chief Financial Officer, even went as far as describing the west European beer market as “singularly unattractive”.

Although the excitement has died down since, many market observers still believe that the days of S&N are numbered.

What are the options for a buyer? Obviously, the most valuable part of S&N is its stake in BBH. That alone could attract a host of buyers. But would they want to sit on a board together with Carlsberg, the other owner of BBH? That is the question. To all appearances, BBH’s erstwhile owners, the Finnish families Hartwall and Therman, who together with Swedish and Norwegian brewers had set up BBH, would rather sell to S&N in 2002 when they had wanted out, than to let Carlsberg have their stake.

You bet the Finnish who still sit on S&N’s board, would not be happy if S&N was sold to Carlsberg. Nevertheless, Carlsberg would be the best fit for S&N. Because, let’s face it, why should Diageo want to get involved with brewing, especially in the UK? We are not spilling any secrets if we tell you that brewing in the UK is far from profitable. If we interpret Nils Andersen’s words correctly – Carlsberg’s CEO once reportedly said that the UK beer business for Carlsberg was a “leaking sack”, or something to this effect – then Carlsberg is not making any money there. And no one else is. However, what is profitable, if not to say, highly profitable in the UK, is pub retailing.

How S&N and Carlsberg would organise their union is still in the air. They could form some sort of combination like Interbrew and AmBev when they became InBev, or one could take over the other. Carlsberg has already made some important steps towards a potential offer by changing the statutes of its major shareholder, the Carlsberg Foundation, which have so far stood in the way of Carlsberg making a major acquisition.

In May, the Danish Ministry of Justice and Civil Affairs approved the Carlsberg Foundation’s decision to lower its holding requirements in the brewing group.

The Carlsberg Foundation, which is the group’s controlling shareholder, must now hold a minimum of 51 percent of the votes and 25 percent of the share capital in the group, versus the previously required minimum of 51 percent of the share capital.

This move was seen by analysts as a decisive step towards raising serious money should Carlsberg plan a takeover. Gudme Raaschou analyst Michael Rasmussen was quoted as saying that Carlsberg may get a capital injection of up to DKR 45 billion (EUR 6 billion) through the Foundation’s move and that this is seen as clearly positive. “Now Carlsberg has the possibility to participate in the consolidation on the (brewery) market, for instance through buying Scottish&Newcastle,” Rasmussen said.

The Carlsberg Foundation was established by Dr Carl Jacobsen, brewer, and his wife Ottilia Jacobsen under a Charter dated 20 January 1902 with the aim of supporting the arts in the founders’ native country. In a deed of gift of the same date the founders also donated the Carlsberg Brewery to The Carlsberg Foundation, and the Carlsberg Foundation was at the same time guaranteed a quota of the brewery profits.

The only big regulatory hurdles a Carlsberg-S&N tie-up would face are in the UK, where they would have a joint market share of 39 percent, in Portugal where they would control 90 percent, and in Finland where their market share would reach 79 percent. But given the continuing drive towards consolidation in the brewing industry, the mergers and monopoly commissions might relent a bit and let the deal go ahead, even though they could insist on the sale of several brands.

To repeat, all of the above is pure speculation. Yet, one of these days we will be able to post the following: “Didn’t we tell you so?”