S&N gulps Hartwall and moves into Russia

Rapid consolidation is being fuelled by the brewers' drive to expand into faster-growing markets in the East
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Scottish & Newcastle, the UK's biggest brewer, continued the rapid consolidation of the global beer industry yesterday when it struck an agreed £1.2bn deal to buy Hartwall, Finland's leading drinks group.

The all-share deal gives S&N a 50 per cent stake in BBH, Russia's biggest brewer, which has 30 per cent of the market. BBH owns the Baltika brand of premium lager which is the third-largest beer brand in Europe after Heineken and Amstel. Hartwall is best known for the Lapin Kulta brand which dominates the beer market in Finland.

The deal represents S&N's first major foray outside Western Europe and means it will have three of Europe's top 10 selling beer brands, adding Baltika to Foster's and Kronenbourg which it already owns.

The surprise acquisition makes S&N a major force in Eastern Europe where beer sales are growing strongly. Russia is seen as a particular hot spot with beer sales growing by 30 per cent last year, as women and young people increasingly turn to beer from vodka. S&N will also now have 45 per cent of the beer markets in the Baltic states of Latvia, Lithuania and Estonia.

However, Brian Stewart, S&N's chairman, said it was not certain if the group would decide to sell Baltika in UK pubs, or distribute its other brands such as John Smith's Bitter and Newcastle Brown ale in Moscow bars. "We will have to wait and see," he said. "You can't force a brand on a market before it is ready. But what we are doing here is developing Scottish & Newcastle as a major international brewer and creating a leading force across the whole of Europe, from Siberia to the Atlantic."

The deal marks the latest in a series of major takeovers in the sector as the world's largest brewers jockey for position in a consolidating market. With beer sales flat or falling in Western Europe and North America, brewers are looking elsewhere for growth. Some are targeting emerging markets in Latin America, Eastern Europe or Asia while others are adding scale by buying top brands in more established areas.

The past few years has seen a slew of mega-deals take place. Interbrew, the maker of Stella Artois, has gulped down Bass Brewers, Whitbread's brewing interests and Becks, the German beer. Coors, the US brewer, snapped up Carling for £1.2bn just before Christmas after Interbrew was forced to sell it by the competition authorities. S&N bought the French brewer Kronenbourg two years ago, Hartwall yesterday and last month struck a deal to invest £60m in the Indian lager Kingfisher.

Elsewhere, South African Breweries has continued its strategy of buying up brewers in fast-growing emerging markets including its $537m (£376m) acquisition of the biggest brewer in Honduras in December.

Commenting on the shake-out Nigel Popham, a drinks analyst at Teather & Greenwood, said: "The driver is the maturing of Western markets. In the UK, for example, beer is being affected by the move towards bottled products such as Bacardi Breezer and vodka-based products."

Other deals have also been mooted. Heineken missed out on the deal to buy Carling while Scottish & Newcastle has been linked to a three-way tie up with South African Breweries and Miller Brewing of the US. In November Interbrew was furious when leaked documents showed it had run the slide rule over South African Breweries with a view to a deal. Interbrew said the documents were part of a routine examination of competitors.

However, given the scale of consolidation which has already taken place the scope for further deals between the major players is becoming limited due to the perceived risk of falling foul of the competition authorities. This further explains the scramble to snap up niche players with high market shares in growing markets.

Yesterday's deal from S&N drew a mixed reaction from analysts as the shares fell 41p to 538p. Stuart Price at WestLB Panmure applauded the move and raised his recommendation on the stock from "neutral" to "outperform". "They finally bought a business with a growth engine," he said, a reference to S&N buying brands such as Kronenbourg where the local market is as mature as the UK.

Mr Popham was less certain, calling the deal "a bit of a punt on the Russian economy". He added: "Long term it looks reasonable but there are uncertainties in between."

Some analysts speculated whether the deal meant S&N would now sell its 1,450 estate of pubs. But Mr Stewart said there were no such plans.

He said Russia was an exciting prospect with Russian beer consumption more than doubling since 1997 as young people move away from vodka. In contrast, UK and French markets are forecast to fall by about 1 per cent a year until 2010, according to analysts.

Hartwall was founded in 1836 and last year made profits of £56.7m on sales of £493m. Its BBH joint venture was signed in 1991 with Carlsberg and has been growing sales rapidly. S&N said yesterday that it had no plans to buy the Carlsberg stake in the business. "We see no reason why that relationship should change," Mr Stewart said.

Cost savings are expected to amount to £10m to £15m a year after the second year, with most of the gains coming from better buying terms. The deal will be earnings dilutive in the first year of operation.

Under the terms of the deal, S&N is offering 3.152 new S&N shares for each Hartwall share. S&N has received irrevocable acceptances from the holders of 83.5 per cent of the shares. Erik Hartwall, the managing director of the family holding company, will join the board of S&N, along with Henrik Therman, the chairman of BBH. The 32 Hartwall family members will end up with a 13 per cent stake in the combined businesses.