A desperate S&N may sell its Russian Baltika operations to save itself; or it may seek an alliance with bigger rivals to repel a combined Danish-Dutch offensive, writes Kiron Kasbekar.

Scottish and Newcastle, the Edinburgh-based British brewer, may sell its Finnish holding company to thwart a likely joint bid from rival beer-makers Denmark''s Carlsberg and the Netherlands'' Heineken.

On 17 October 2007, the two raiders made known their intention to join hands to acquire S&N. Their plan assumes that Carlsberg would take over S&N''s interest in Russia-based brewer Baltic Beverages Holding (a 50:50 joint venture between S&N and Carlsberg) and its operations in France and Greece. Heineken would take over the rest of S&N''s European operations. The likely cost of acquisition: around $15 billion.

S&N, which is known for brands such as Foster''s, Kronenbourg and Baltika, has responded with a statement that the proposed joint bid was "unsolicited and unwelcome". Or, in one word, hostile. It wants to remain an independent entity, and has advised its shareholders to ignore the hostile bid.

It seems to be yet another instance of a joint venture partner wanting to buy out the other partner - except here the aggressor (Carlsberg) has to cast its net wider than is usually the case. BBH owns Baltika, the biggest brewer in Russia, which is the third largest beer market in the world. Carlsberg, it seems, has been eager to buy S&N''s stake in the highly attractive BBH; but its joint venture agreement is coming in the way.

Under a "shoot-out" clause in the agreement, if one partner declines to take up the other partner''s offer to sell its 50 per cent stake in the joint venture at a set price, the first partner is entitled to buy the other partner out at the same price. So if Carlsberg pushes S&N too hard on BBH, it could end up losing the venture. It''s simpler for Carlsberg to make a grab for S&N instead. But, given the Danish group''s size, it couldn''t do that on its own. So it chose Heineken as a partner.

It is not clear what would happen to S&N''s operations in Asia, including China and India. In India, S&N owns a 37.5 per cent stake in United Breweries, in which Vijay Mallya and his associates own a similar stake. But India accounts for a tiny fraction of global beer sales. China, on the other hand, is much bigger and growing faster. In 2002 it overtook the US in beer consumption to become the biggest beer market in the world. (See table below.)

Scottish & Newcastle owns or has an interest in over 50 breweries worldwide, producing more than 50 million hectolitres annually. The group has more than 15,000 employees in direct operations in Europe, another 15,000 in joint ventures in Eastern Europe and over 7,000 in joint ventures and invested companies in Asia (including the UB Group in India).

Speculation is rife that a desperate S&N may dispose of Hartwall, its Finnish holding company, which owns its 50 per cent stake in BBH, in which Carlsberg holds the rest. BBH has operations in Russia, Ukraine and Kazakhstan besides the Baltic countries of Estonia, Latvia and Lithuania.

Baltika bottling operations

This would be a tough decision for S&N since BBH controls over 85 per cent of Baltika. The Baltika operations are said to contribute about a third of S&N''s and Carlsberg''s profits. According to S&N, "Baltika is the one truly nation-wide beer brand in Russia and is the market leader with a 10.5 per cent share of the Russian beer market and almost 30 per cent of the canned beer segment."

Another option S&N may consider is roping in a strategic partner from within the industry. Candidates include SABMiller, the UK-headquartered beer group and Anheuser-Busch of the US (maker of Budweiser beer). Both these groups are much bigger. Each of them is about double the size, in beer sales volumes, of Heineken and about three times the size of Carlsberg. That leaves world leader InBev, based in Belgium, with brands such as Skol, Lowenbrau and Beck''s.

The hitch in a potential SABMiller intervention may be that this group may be constrained by having very recently deciding to merge its US operations with those of Molson Coors into a venture called MillerCoors. SABMiller ranks second in the US market after Anheuser-Busch, and Molson Coors third, and their combination is considered as likely to give the Budweiser maker a run for its money. The two groups will have equal voting rights in MillerCoors, but SABMiller will get 58 per cent of its profit compared with Molson''s 42 per cent.