Last Call for Newcastle Heineken, Carlsberg Nab Scottish Brewer

Scottish & Newcastle, brewer of Kronenbourg and Newcastle Brown Ale, will split its holdings between the two larger rivals.

By Mark Scott


Crates of beer sit outside a Scottish & Newcastle-owned Kronenbourg brewery in Obernai near Strasbourg.
REUTERS

Crates of beer sit outside a Scottish & Newcastle-owned Kronenbourg brewery in Obernai near Strasbourg.

It was last call for Britain's largest brewer, Scottish & Newcastle, on Jan. 25 after the Edinburgh-based company accepted a $15.4 billion (€10.5 billion) takeover offer from Denmark's Carlsberg and Holland's Heineken.

Under the proposals, Scottish & Newcastle, whose brands include Kronenbourg, Newcastle Brown Ale, and Strongbow cider, will be split up between its larger rivals in a deal that should be completed by the second quarter of 2008.

Heineken, which put up 46 percent of the capital, will pocket the British brewer's operations in many Western European markets, as well as in the US and India. Carlsberg, which is funding its bid through debt and a $6.1 billion rights issue, gets Scottish & Newcastle's business in France, Greece, China, Vietnam, and -- most important -- full control of Russian brewer Baltika to boost its presence in fast-growing Central and Eastern European markets.

Shares Down Since Bid's Launch

"This deal was inevitable as Scottish & Newcastle was one of the last independent brewers left in the world," says Sam Hart, analyst at stockbroker Charles Stanley in London. "Being part of a larger company will help the brands expand."

The markets, though, were more cautious: Heineken shares on Jan. 25 closed down 0.6 percent. With its larger capital outlay, Carlsberg stock similarly felt the pinch and finished trading down 4.1 percent. Both stocks have posted double-digit declines since the takeover bid was first announced in October, 2007.

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While Scottish & Newcastle has a stable of high-profile brands, the changing nature of the beverage sector has put the squeeze on the 256-year-old firm. Rising commodity prices for industry staples such as barley and aluminum have pressured margins at a time when consumers are turning to other alcoholic drinks and premium lager brands.

Planning to offset these problems, Heineken said on Jan. 25 it expected to save almost $238 million from synergies annually. Similarly, Carlsberg said incorporating Scottish & Newcastle's business would lead to $256 million in cost reductions in the first full year of operations.

Strained Relations Set Aside

The major coup, though, was Carlsberg's acquisition of Russian brewer Baltika, which was previously structured as a joint venture between the Danish company and Scottish & Newcastle. According to forecasts disclosed on Jan. 25, earnings before interest and tax for Baltic Beverages Holding, Baltika's parent company, will increase 34 percent by 2010 to $1.5 billion as Russia's growing domestic market will climb 3 percent to 5 percent annually over the next three years. "The Russian operations are the jewel in the crown of this deal," says Charles Stanley's Hart.

Relations between Scottish & Newcastle and Carlsberg have not always been sweet. The British brewer began arbitration against the Danish company in October, 2007, over the ownership of Baltic Beverages Holding, accusing Carlsberg of breaking a shareholder agreement when it put forward its takeover of Scottish & Newcastle. Carlsberg denied the allegation.

Such acrimony was swept under the table on Jan. 25 after Scottish & Newcastle secured a price from its two rivals that was 11 percent higher than first proposed in 2007. The deal must still get approval from Europe's competition authorities, although analysts expect this to happen over the next few months.

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