DTI set to give green light to Bass deal

Bass has persuaded the Government to wave through its proposed acquisition of Carlsberg-Tetley with far less onerous conditions attached than had been previously thought. Details of a deal which will catapult Bass into pole position in UK brewing are expected to emerge later this week or early next.

Bass yesterday confirmed the City's worst-kept secret, admitting that it was in negotiations with Allied Domecq to buy its half share in the brewing venture with Denmark's Carlsberg. It is expected to pay about pounds 200m to take Allied out of brewing and to offer Carlsberg a minority stake in its brewing arm in exchange for the Danish company's 50 per cent share.

Several factors are thought to have persuaded the President of the Board of Trade, Ian Lang, to look favourably on the proposed tie-up. Bass is understood to have given undertakings on brewery closures and market share, and to have persuaded the government that the deal could increase competition and strengthen the company's hand in overseas markets.

Analysts had expected at least one closure among the combined group's 14 breweries, in addition to the Carlsberg-Tetley site at Warrington which has already been earmarked for closure in October.

It emerged yesterday, however, that capacity constraints at Bass, which contracts out some of its current production to third-party brewers including Vaux, Greene King and Marstons because it cannot meet demand, could mean no more sites need to be shut.

Although the logic of the merger is still driven by cost-cutting in response to industry trends which have seen on-trade beer volumes fall rapidly in recent years, it is expected that the bulk of savings will come from shedding jobs in the combined group's distribution network and from better buying power in packaging, one of the largest variable costs in beer production.

Combining Bass with Carlsberg-Tetley will mean the group leapfrogs Scottish Courage to become the country's largest brewing group, but it is thought estimates of market share of up to 40 per cent are too high. Thanks to the acquisition by Whitbread of Labatt's UK brewing arm, the combined share after any deal might only be 35 per cent compared to Scottish's 31 per cent, possibly low enough to avoid a monopolies reference. Whitbread, the only other sizeable player and a strong competitor in the fast- growing take-home market, has just 14 per cent.

Other key elements in Bass's pitch to the competition authorities appear to include the extent to which an end to the supply agreement between Carlsberg-Tetley and Allied Domecq's 4,000 strong pub chain no later than the end of 1997 will actually create a more competitive market. Bass expects a sharp deterioration in the terms of any new contract with Allied's pubs, confirming its claim that there has been a power shift in the beer market from suppliers to purchasers.

Bass is also understood to have indicated that despite heavy duplication between the two portfolios, pitching Carlsberg lager against Carling Black Label and Special Brew against Tennent's Super, it is unlikely that any brands will be ditched immediately, although some may be sold if required by the OFT.

Finally, the company is thought to have demonstrated that creating a stable market at home would be conducive to an accelerated push by British brewers in overseas markets, such as China and Eastern Europe, where there is scope for considerable growth. Bass yesterday said it had taken a 20 per cent stake in Czech brewer Pivovar Radegast, one of the country's four largest brewers. It already holds 46 per cent in Prague Breweries and stakes in two smaller Czech brewers.

Speculation has focused on the pubs that Bass might need to dispose of as a quid pro quo for increasing its market share from its 24 per cent. Analysts have said the terms of the recent takeover by Scottish & Newcastle of Courage might mean Bass shedding up to 1,000 pubs, almost one-fifth of its estate.