Glenboden M & A Originations

Initial Carlsberg & Heineken bid for Scottish & Newcastle is too low and spuriously justified

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Origination Status public announcement of written proposal for group acquisition, October 2007
Asset Scottish & Newcastle plc (UK), global no. 7 beer producer
Buyer Carlsberg A/S (Denmark), global no. 5 beer producer, together with Heineken NV (Holland), global no.4 beer producer
Seller shareholders of Scottish & Newcastle plc
Financial Terms initial bid price of 7,6 bln GBP for 100% of shares, in cash, represents enterprise value P/S of 2,3 and P /EBITDA of 13,6 (2006A)
Buyer Rationale Carlsberg to gain market leadership in Russia and France, Heineken in UK
Seller Rationale bid speedily rejected by S&N Board as ‘wholly inadequate’
NBs written proposal seeks to justify proposed valuation by reference to benchmarks
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The disagreement between buyer and seller, in this deal, stems from a difference over the valuation of S&N’s 50% shareholding in the BBH joint-venture, which in turn owns about 85% of Baltika, Russia’s no.1 beer brand and stellar performer in growth and margins terms. Legal action is threatened by S&N over this; even if resulting arbitration proceedings come to an enforceable conclusion, this will not prevent one side from e.g. suing the other through some litigation process. The legal wrangles could continue indefinitely; hopefully, it can all be solved by money instead, through a more acceptable i.e. higher valuation.

Carlsberg has justified its initial bid for S&N, inter alia because the EBITDA multiple is ‘materially higher than those paid by S&N for its recent major acquisitions’. We think this line of argument is spurious, even unprofessional, for several reasons:

• The transactions quoted are not comparable to the proposed acquisition. S&N is a global beer business, whereas the three companies in question were nationally focused (Finland, Portugal, France and Belgium respectively). This alone justifies a significant premium for S&N as a whole

• In the case of Centralcer, S&N already held 49% of the shares, and in the case of Kronenbourg and Alken-Maes, the seller Danone was exiting the beer business. These factors are likely to have depressed the valuations of those two deals, making them even less comparable to S&N

• We are nearly at the end of 2007, so 2007F EBITDA should be used instead of 2006A. S&N looks set to grow its EBITDA by conservatively 10% this year, so the P /EBITDA offered by Carlsberg is not 13,6 but rather 12,4.

The bidders go further in their unprofessionalism, by arguing that the offer is ‘substantially in excess of the standalone independent value of S&N’. The obvious response to that is, ‘so what ? Ever heard of synergies ?’ On top of which, the acquirors really shouldn’t have to be justifying their valuation so vigorously; it’s as though they’ve already admitted they’re wrong.

A more appropriate way for Carlsberg to justify its valuation of S&N is to compare this number to that paid in other global beer consolidations in the last five years or so. Failing that, they should look to other, smaller scale beer acquisitions, say of single brands with limited geographies, and make the appropriate adjustment to take into account the higher quality of S&N’s diversified earnings. This would yield a valuation multiple significantly north of x14 EBITDA, in our judgement.

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Size (€ mln) 14.400
Sector brewing
Asset Quality global no.7 branded
Seller large plc
Buyer large plc
P/S 2,3
P/Ebitda 13,6
Type enterprise value
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