S&N Defends Itself in Wake of Consortium Bid
S&N has reached an agreement with Centrale Européenne de Distribution ("C10", the largest independent French wholesaler) to sell a large proportion of its wholly-owned French on trade distribution businesses for c.£85m.
20/11/07 Scottish & Newcastle has reiterated its negative stance on Carlsberg and Heineken’s joint bids to take it over. In a trading statement, the Board of S&N said it is in no doubt that “the highly conditional proposal from Carlsberg A/S and Heineken N.V. to acquire S&N for 750 pence per share is wholly inadequate, as it substantially undervalues the unique strengths and market positions of S&N. S&N estimates that the Consortium's latest indicative proposal value of 750p per share reflects an equity value for S&N's share of BBH of only around £3.2bn. This does not recognise the value of BBH, and the S&N Board strongly believes that shareholders need further information to be able to make an informed assessment, the UK headquartered brewer said.
"Let there be no doubt: for the team at S&N, shareholder value maximisation is paramount. Nothing is sacred. I passionately believe that Scottish & Newcastle will deliver value to its shareholders that vindicates our response to the consortium proposal," John Dunsmore, Chief Executive of Scottish & Newcastle said. He took on the role this month.
With respect to the arbitration proceedings in relation to BBH, S&N believes it has a robust case. The Arbitral Tribunal will decide whether Carlsberg has (a) irreparably breached the BBH shareholders' agreement and/or (b) circumvented the "shotgun" provisions of the BBH shareholders' agreement so giving S&N the right to acquire Carlsberg's BBH shares. S&N is confident that these claims will be upheld by the Arbitral Tribunal and that it will be in a position to take control of BBH. S&N is prepared to introduce a minority partner to support its full ownership of BBH.
Meanwhile in keeping with S&N's Western Market strategy of focusing efforts on consumers and customers to build brands and grow revenue, the company announced a number of initiatives.
S&N has reached an agreement with Centrale Européenne de Distribution ("C10", the largest independent French wholesaler) to sell a large proportion of its wholly-owned French on trade distribution businesses for c.£85m.
“We expect that C10 will become a major force in on-trade distribution. Brasseries Kronenbourg will have a forward agreement with C10 that strengthens its route to market in the French on-trade and will help its key brands, Kronenbourg Red & White, 1664 and Grimbergen, to grow share further. It will also have an immediate positive impact for S&N in terms of both profitability and cash flow. Under IAS the business will be classified as discontinued. The trading loss for the year, which is anticipated to be around £(12)m (FY2006: £(2)m), will be reported outside of operating profit and the post tax earnings will be excluded from normalised earnings, the company said. The transaction will result in a loss on disposal of c.£370m, the majority of which is goodwill on acquisition.
Contracts have been agreed and the transaction is subject to the satisfactory conclusion of employee consultation procedures, any French anti-trust clearance, and the finalisation of the acquiror's funding requirements. It is anticipated that completion will take place in Q1 2008.
S&N's strategy is designed to maximise value across all its businesses, leveraging its unique portfolio of brands and leading market positions across a number of countries, while decentralising management structures to increase accountability at the country level. In the UK, the Company intends to continue to grow market share and profitability. The UK market has accounted for 60% of the Company's cash generation over the past three years, primarily driven by share growth of the UK's major brewers' profit pool growing from 46% to 60% and profit to cash conversion above 100%. S&N has confirmed four further initiatives to help ensure the UK remains a strong business in the future.
First, the company have carried out a review of our supply chain and, as a result of that review, S&N has decided to enter into a production and packaging agreement with Coors UK. The long-term arrangement will lead to up to 3m hectolitres of on trade volume being produced under contract by Coors. We are now moving into a consultation process with employees but envisage significant cost savings and reduced capital commitment linked to this arrangement.
Secondly, S&N will enter into a joint venture with the Q-Group, a Herefordshire based company to construct a new cider mill in Herefordshire and additionally to create cider capacity of 1m hectolitres - this represents an increase of around 25%. The new company will be supported with an initial ten-year contract from S&N. This transaction reinforces our commitment to Herefordshire, secures capacity to exploit S&N's fast-growing cider brands and avoids the capital expenditure required to extend our own Hereford site.
Thirdly, following a review of its packaging capacity, the company is consulting with its employees on the closure of its bottling plant at Berkshire brewery. The line is now under-utilised and it is planned to move remaining volumes to the Tadcaster bottling facility. In support of this, development packaging and warehousing for the international export of Newcastle Brown Ale will be undertaken by Quinn Group in Cheshire. Cost savings linked to these changes are estimated at £20m with reduced medium-term capital commitment of £80m, with the substantial proportion of benefits starting from 2009.
Finally, the Company announces a new joint venture, Heritage Drinks Limited specifically to support its heritage ale brands and second tier cider brands. This will ensure that these brands get the appropriate level of focus, brand management and marketing support to ensure they continue to offer a real choice in S&N's portfolio.
S&N reported that it has continued to make good progress in most of its core beer markets and brands, and we have extended our clear leadership position in the dynamic cider market, despite a background of poor summer weather. BBH has continued to outperform, with strong performance in Russia and excellent growth in a number of its other markets. There has continued to be underlying market weakness in many of our core Western European markets, and trading conditions in France have remained challenging, both in the on and off-trade. However, these factors are either not expected to recur in 2008 or have now been resolved.
In terms of outlook, the brewer anticipates an improvement in its core Western European markets in 2008 following unprecedented weather across our markets in the key trading period in 2007. “While we foresee a significant rise in input costs, we expect to mitigate this through material price increases combined with cost reduction plans,” the company said.