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Feb 29, 2008

M&a roundup: intoxicating activity

A look at the convoluted takeover of Scottish & Newcastle

Mark Burgess, head of active equities at Legal & General, a big institutional investor, rarely talks to the media. In January, however, he waded into the takeover of UK brewer Scottish & Newcastle (S&N) by two European rivals, Carlsberg and Heineken.

The issue at hand was Baltic Beverages Holdings (BBH), a valuable Russian brewer owned 50-50 between S&N and Carlsberg. Under a partnership agreement between the two companies, Carlsberg could, and did, block the release of BBH's financial prospects, making it hard for the market to know S&N's true value.

Burgess – whose pension fund is a leading shareholder in S&N – was understandably miffed. He called publicly for more transparency, but his demands fell on deaf ears. Carlsberg left the market guessing, and the IR department at S&N had to convince shareholders to back the firm's strategy without revealing the figures to prove its case.

S&N rebuffed three bids from the consortium and threatened to take it to court before eventually agreeing to an offer of 800p ($15.90) per share. 'It was a unique situation,' says Robert Ballantyne, head of corporate communications at S&N. 'We had to apply pressure, otherwise shareholders would not have received full value.'

Special brew
The situation certainly was unique. Under normal circumstances, financial regulations insist that all price-sensitive information is released to the market without delay. The idea is to create a level playing field and prevent an imbalance of knowledge that might allow one party to manipulate the other. But the partnership agreement meant Carlsberg could avoid full disclosure. During the takeover the brewer argued that the BBH data was confidential, and it did not return calls for this article.

With shareholders in the dark, S&N was worried it could be bought on the cheap. 'We were in touch with shareholders from day one, not only explaining the strategy and where S&N was coming from, but also getting feedback,' explains Joanna Speed, head of investor relations at S&N. 'We made our position pretty clear right from the word go and responded very clearly as we went along about whether we thought the offers were value-maximizing.'

S&N rejected bids of 720p, 750p and 780p before finally accepting at £8, valuing the company at £7.8 bn – a price most commentators agree is a good result for shareholders.

'With the price reaching 800p, you can infer there is value there – but obviously we don't know that,' comments Elaine Coverley, beverages analyst at Brewin Dolphin, a wealth manager.

See you in court
Early on, S&N strengthened its position by launching a legal challenge to the joint partnership. It claimed Carlsberg had broken the conditions of the deal, which, if proved, would require the Danish brewer to sell its 50 percent stake in BBH.

Carlsberg denied any breach of contract, but it was desperate not to lose BBH, and that possibility gave S&N an extra bargaining tool. 'The arbitration procedure between the two owners remained a lever to ensure the bidder would be forced into driving up the price,' comments Ballantyne.

Some have accused S&N of pushing its luck during the negotiations. If Carlsberg and Heineken had pulled out, a large share price slump could well have followed. 'No one would have been happy with a big share fall,' admits Speed. 'On the other hand, our management made it very clear it had value-creating positions for the downside if a share price fall did happen, and we were guaranteeing that we would crystallize value for shareholders within the near future.'

Coverley is not so sure. 'Whether S&N could go forward as an independent company depended very much on how the arbitration panel came out,' she says. 'Whether it won or lost would completely influence the firm's future strategy. Without S&N’s stake in BBH what you have is a large market share in some very low-growth western European markets and not much else.'

Last orders
In the end, this situation didn't arise. S&N decided that 800p constituted a fair price and recommended it to shareholders. 'We've done a lot of work on the options available to S&N as an independent company,' says Speed. 'If you get to a point where the deal is maximizing value, you really have to recommend it.'

Carlsberg and Heineken now plan to break up S&N between them. It is a sad end for the UK brewer, which can trace its roots back over 250 years to a small producer of pale ale based in Edinburgh, Scotland.

But at the same time, the result is a victory for the company's strategy. S&N pushed its rivals all the way and achieved a premium for its shareholders – and that’s something for Burgess to raise his glass to.