The highlight of any visit to the Heineken Experience, a kitsch museum in Amsterdam that offers a booze-laden trip through the history of Holland's iconic brewer, doesn't come until the end. After several complimentary pints, tourists step into a darkened theatre fitted with a hydraulic floor that shakes and jerks them in tandem with a film charting the life of a beer bottle as it wends its way through the brewing process. For the less sure of foot, there are handrails to grab on to.
All in all, it's an odd experience that can leave one bleary-eyed and, thanks to the copious amounts of lager, feeling a bit wobbly. It's not unlike the situation brewing in the global beer industry. Just a few years removed from the last wave of mergers remade the industry, a fresh fit of consolidation is under way.
Yesterday, Heineken and its bidding partner Carlsberg made a sweetened 750p-per-share, £7.3bn offer for Scottish & Newcastle, but were swiftly and summarily rejected by the UK's last big brewer. The producer of Newcastle Brown Ale and Kronenberg 1664 deemed the bid – £500m richer than the first £6.8bn bid they made last month – "a marginally increased proposal [that] continues their attempt to get S&N's unique portfolio of businesses on the cheap".
The tussle is likely to drag on for some months yet. S&N has filed a lawsuit to wrest control of the joint Russian brewing venture it controls with Carlsberg. Analysts estimate that the Danish and Dutch partners will have to come up with a bid of up to 800p per share, equivalent to an additional £2.2bn.
News of the S&N bid broke just days after SABMiller and Molson Coors unveiled a plan to combine their operations in America to challenge Anheuser Busch, the brewer of Budweiser that controls nearly half of the US market, the second largest in the world after China.
The motivations driving the deals on both sides of the Atlantic are similar. Principally, it has to do with changing drinking habits in Western Europe and America. In the world's most mature markets, growth has slowed as people shy away from mass market brands in favour of niche microbrews, wines and spirits. Graham Mackay, the chief executive of SABMiller, the world's No 2 brewer after Belgium's InBev, has labelled Western Europe a "singularly unattractive" market.
Costs, meanwhile, continue to rise. The price of malt, the key ingredient for beer, has doubled in recent months due to a disappointing growing season last year and farmers switching to other more expensive grains, such as wheat. The price of aluminium has also sky-rocketed amid the global commodities boom.
It's that bitter cocktail of rising costs and anaemic growth that has the world's beer behemoths looking abroad, principally to emerging markets, where populations are big but the taste for beer is still relatively new. Among these new markets, Russia is king. The country already consumes nearly twice as much as the 60 million hectolitres glugged in the UK annually. It's growing at many times the rate of the UK as well and is now the fourth largest market after China, America and Brazil. Hence the scrum for Scottish and Newcastle. The jewel in its crown is its 50 per cent stake in Baltic Beverage Holdings, owner of Russia's leading beer brand Baltika. Carls-berg owns the other half. In recent interim earnings, BBH registered an astonishing 33 per cent growth in sales, well beyond the much more modest gains achieved by either of its owners.
S&N is also stuck in an awkward market position. Sitting just outside the circle of top global brewers, it is not quite large enough to be able to exert the same pricing power and global supply and distribution synergies of the likes of InBev or Anheuser Busch. But for rivals keen to get in front of the next stage of consolidation, it would provide immediate access to the top spot in several key markets and is of a size that makes it just about digestible.
Under the proposed takeover plan, Carlsberg would take full control of BBH, as well as operations in France, where S&N leads the market with Kronenberg 1664, and Greece. Heineken would get the operations in the rest of Europe and the UK, where it has a paltry 3 per cent market share. Both companies would probably to be able to wring some cost savings by combining distribution and supply networks.
For now, S&N, led by its chairman Sir Brian Stewart, is resolutely opposed to selling out. Sir Brian is understood to be furious with Carlsberg, its partner in BBH since 2002, for the manner in which the deal was proposed – a stock exchange announcement published with no prior notice.
Yet analysts think that now that it has been put in play, the chances of its retaining its independence are slim, even if it sees off its current suitors. Andrew Holland, at Dresdner Kleinwort, said: "Given the bad blood between Carlsberg and S&N, you can't really see them going back to the status quo. It is unlikely it will remain independent."
In the near term, the most intriguing aspect of the bust-up is who will end up owning BBH. Mr Mackay of SABMiller, brewer of Amstel and Peroni, called Russia "the most exciting market in the world" yesterday. Yet at the moment his company sits a distant fourth behind BBH's Baltika in the country. S&N is understood to be sounding out possible buyers, SABMiller among them, which might be willing to pay more for their stake in BBH than Carlsberg will be able to muster. When asked, Mr Mackay declined to say whether he would wade into the S&N situation.
S&N is also forging ahead with arbitration proceedings against Carlsberg, alleging that the Danish brewer, by launching its offer, had breached the shareholder agreement that governs BBH. As a penalty, S&N argues, Carlsberg should be forced to sell it its stake in the Russian brewer. Carlsberg argues that the charge is baseless.
If Carlsberg does end up getting its hands on BBH and the other bits of S&N it covets, some analysts warn that it could end up being a pyrrhic victory. Heineken, significantly larger than either S&N or Carlsberg, would have little trouble financing its end of the deal. Carlsberg, on the other hand, only slightly larger than S&N in terms of production, but worth significantly less, will have to dig much deeper. "This will be earnings dilutive and the return will be well below the cost of capital," Mr Holland said. "From a hard-nosed nosed financial consideration, it's not a not a good deal at all."
Meanwhile, the tectonic plates of the industry in America are beginning to move. Over the past year, most big brewers in the US enjoyed record numbers. Anheuser Busch, the market leader and No 3 globally, had a much rougher time. Rumblings about the Budweiser brewer's inability to head off the increasing threat from microbrews and the growing line of higher-end beers being rolled out by competitors, are growing. Analysts predict that it may be forced into a mega-deal with InBev, the Belgian brewer of Stella Artois and Becks. "The most direct path for realising maximum shareholder value would be a merger with InBev," said Carlos Laboy at Credit Suisse. "The writing on the wall continues to build and a mega-transaction with InBev may be too compelling to ignore over the long term."
If that happens, the world will get more uncomfortable still for S&N, unless of course it has already been drunk up by someone else.
Drinkers line up exotic premium lagers
Consumers are ditching their usual pint in favour of exotic premium lagers, according to SABMiller. The brewing giant reported a 42 per cent increase in sales at its UK subsidiary Miller Brands in the six months to September, driven by Peroni Nastro Azzurro, its Italian brand, Pilsner Urquell from the Czech Republic, and the Polish lagers Tyskie and Lech. The group's Peruvian brand Cusquena has also seen as upsurge of sales, with growth of 35 per cent as consumers get used to paying more as they try out different brands. " The UK premium lager market is experiencing unprecedented change," said Alan Clark, managing director of SABMiller. "Some of the country's most enduring premium beers are seeing declines following a number of years of aggressive expansion." Lager volumes have been declining in the UK, partly due to social changes which have seen the pub transformed from a place where working men would sink up to ten pints a night into family friendly environments serving fine foods and wine. Tastes have changed and consumers want to try a wider variety of drinks. Rosé wine and cider enjoyed a resurgence over the summer but consumers also want to drink brands they have first experienced overseas. To make up for falling lager volumes in the UK, drinks companies are investing in premium brands and buying up international brands to introduce into different markets. Guinness's owner Diageo has introduced a less bitter variant on the Irish drink called Guinness Red, which it hopes will appeal to women, while many brewers have invested in super-chilled versions of their most popular lagers. Gary Whitlie, the managing director of Miller Brands, said a new space had opened at the top of the premium lager market for beers "with distinctive taste profiles, authentic provenance and genuine import status".
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