Glenboden M & A Originations

Carlsberg’s new warchest too big for anything except Scottish & Newcastle bid

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Origination Status strategic announcements about bolt-on acquisitions and mergers; August 2007;
Asset candidates include Scottish & Newcastle, Royal Unibrew, numerous add-ons;
Buyer Carlsberg A/S (Denmark), global no. 5 beer producer;
Seller shareholders of respective companies and businesses;
Buyer Rationale expansion in existing core markets or increasing global share;
Seller Rationale attractive valuation;
NBs Carlsberg management announced bolt-on acquisition strategy in March, but in June the Foundation’s management disclosed plans for a larger merger.
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With other beer majors busily making add-on acquisitions in key geographies like central Europe and China, what’s holding things up at Carlsberg? Analysts have attributed Carlsberg’s inactivity to capital constraints, caused by the Carlsberg Foundation’s charter’s requirement that it retains at least 51% of the company’s shares, a requirement that only recently has been changed. The capital raising envisaged by the newly –liberated Carlsberg is reported to be in the region of € 10 bln. That would be far too big to signal only a bolt-on acquisition strategy only; too big also for the acquisition of Royal Unibrew; only a bid for Scottish & Newcastle would soak up so much cash.

‘Bolt-on acquisitions’ are relatively small deals, in markets where the buyer already has a significant presence, but wants to increase market share by a few percentage points, or acquire new brands or capacity, or squeeze out more cost synergies.

By these criteria, SABMiller is going like a train. Less than a month ago, the group announced the acquisition of Browar Belgia in Poland. More recently it announced as many as four simultaneous bolt-ons in China (in Liaoning, Anhul and Hunan provinces).

Then there’s Heineken, who recently made a significant bolt-on acquisition in the Czech Republic, that of Krusevice. Not to mention Royal Unibrew, Carlsberg’s regional competitor, who in February acquired Łomża in Poland, and earlier this month acquired Livu Alus in Latvia. Carlsberg clearly is not playing in that particular game.

For a while, Glenboden tipped Carlsberg to buy Royal Unibrew, which technically meets the definition of ‘bolt-on acquisition in existing markets’, being focused on the Nordic countries and eastern Europe, while at the same time being of sufficient scale to be high on Carlsberg’s corporate wish-list.

But we have to admit that, in the light of subsequent information, even Unibrew is too small, with a likely valuation of possibly € 2 bln, given the size of Carlsberg’s expected war-chest. So, Scottish & Newcastle now stands out as the prime candidate.

There’s been talk of Carlsberg only buying out S&N’s half of the two groups’ Baltika JV in Russia. But it would arguably be cheaper, and even simpler given how JV agreements are often drafted, for Carlsberg to just buy the whole of S&N plc.

Baltika, no. 1 beer brand in Russia, with a staggering 35% growth rate and 30% EBITDA margin, might well command a valuation of even 50% of that of S&N, especially given recent precedents in Russian M&A. Amazing, when one considers that the cca. 45% of Baltika’s revenues ‘attributable’ to S&N make up only 20% of S&N’s total sales.

At the end of the day, the big consolidation story is irresistible, and consistent with M&A trends in an ‘adjacent’ food sector. Carlsberg, global no. 5, merges with S&N, no. 6, to challenge Heineken for the no. 4 spot, and exploit major synergies in western Europe. It’s a story with close recent precedents in the tobacco industry – Imperial’s bid for Altadis, and JTI’s acquisition of Gallaher.

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