Acquisition tipped as Scottish and Newcastle pubs go on sale

Rivals with big pockets could come knocking at Scottish & Newcastle’s door following the firm’s decision to sell its £2 billion pub business in the coming week.

With the costly acquisitions of Portugal’s Central Cervejas and UK small cap Bulmer weighing on the shares, the UK’s number two brewer, which is transforming itself into a nice, clean brewing business with a stable of strong brands, makes an attractive stock.

Benefits in Europe for A-B

Leading global market analyst Euromonitor sees US giant Anheuser-Busch, owner of the world’s leading beer brand Budweiser, as suitable acquisition candidate. Taking on Scottish & Newcastle would offer it some interesting synergies, not to mention the competitive benefits of consolidation in Europe. Anheuser-Busch currently ranks at 20, accounting for just over 1% of total volume sales in Western Europe in 2001. An acquisition of Scottish & Newcastle would increase the company’s share in Europe by 7 percentage points, pushing the company to third place in the region, behind the two leading European brewers, Heineken and Interbrew.

But the potential acquisition is of interest not just for the clear benefits that it would bring the company in Europe. Scottish & Newcastle’s share of 0.1% of the North America market is also significant to Anheuser-Busch in terms of the new products it has to offer. Scottish & Newcastle’s presence in North America is chiefly through exports to the US of dark beer Newcastle Brown Ale and Beamish in stout.

Although small categories in a US market dominated by lager, both stout and dark beer are also the fastest growing compared to lager which actually experienced a marginal volume decline in 2002. The distribution network and marketing clout of Anheuser-Busch will enable it to grow brand sales much faster than Scottish & Newcastle has been able to thus far.Such a venture would reinforce the global giant’s position as the leading brewer in the US, with estimated combined sales of 12.1 billion litres.

UK is prize asset for Interbrew

Scottish & Newcastle is also thought to be on the radar of Belgian brewer Interbrew. A deal could strengthen Interbrew’s position in Western Europe, ensuring it almost doubles its share in the region, taking it to the number one spot. The UK is easily Scottish & Newcastle’s most important market, accounting for around 75% of sales and over 82% of operating profit in 2002.

A deal would also bring a balance to Interbrew’s operations in France, by propelling it above Heineken to rank number one in the country. Furthermore, with only a minimal presence in Portugal currently, the company would be able to take advantage of Scottish & Newcastle’s well-established ties with Central de Cervejas, where it currently ranks second with volume sales of 213 million litres.

SABMiller

Other potential acquirers include SABMiller, the world’s second largest brewer, formed in a merger between South African Breweries and Miller Brewing last year. SAB Miller already ranks second in Western Europe, accounting for over 10%. An acquisition of Scottish & Newcastle would take the company’s share in the region to a full 17%, leap-frogging Heineken to lead the region.

Strategic assets worth having

Any deal with Scottish & Newcastle would include Europe’s ninth largest selling lager Kronenbourg, which remains the prized asset for any prospective buyer. Scottish & Newcastle’s 50% joint venture in Russia’s Baltic Beverage Holdings is also a strategic asset worth holding, not the mention its John Smiths brand, which holds a 4.6% of the UK market.

With the European market, as in North America, now all but consolidated, it looks like a sale of Scottish & Newcastle could be the last call for large beer acquisitions in Europe. Its takeover by one of either Anheuser-Busch, Interbrew or SABMiller would certainly prove a valuable strategic asset in what has become an exceptionally competitive market place.