One too many for Interbrew

UK pub owners are ready for a bar-room brawl with a Belgian interloper

For a man who works a 16-hour day and is one of Britain's best- paid financiers, you would have thought that Guy Hands would spend very little time worrying about the price of a pint of beer.

For a man who works a 16-hour day and is one of Britain's best- paid financiers, you would have thought that Guy Hands would spend very little time worrying about the price of a pint of beer.

But the head of structured finance at Japanese investment bank Nomura owns 5,000 British pubs and is troubled by the growing power of a Belgian brewer called Interbrew. "The company has an absurd concentration of power in the UK. It will almost certainly lead to an increase in the price of beer," says Mr Hands.

He's not alone in this view. A gang of similarly well-to-do pub owners are squaring up to Interbrew for what could become an almighty pub brawl.

The trigger for the stand-off was a summer spending spree which made Interbrew the world's second largest brewer. It shelled out £400m for Whitbread's brewing division and then £2.3bn for Bass Brewers, giving it a 32 per cent share of the UK market. Together with Scottish & Newcastle, the two companies now control over 60 per cent of UK brewing.

This has caught the eye of the competition authorities, which are investigating Interbrew's new UK power base. Already the pub owners are firing broadsides in Interbrew's direction.

Mr Hands says: "In brewing there are no synergies or cost advantages in putting companies together. The only motive for doing so is to create a dominant company to put pressure on prices. Interbrew is a monopoly just as Microsoft was."

Jon Moulton, managing partner of the venture capital group Alchemy, which owns 1,000 pubs, says: "In my view the Bass deal was a step too far. As a result, prices will rise and competition will fall."

The most outspoken pub owner is Hugh Osmond, chairman of Punch Taverns, the venture capital-backed company that owns 5,150 pubs. He claims the deal is a "total stitch-up" that will force regional brewers out of business, cause pubs to close and pub investment to fall.

Both beer-brewing and pub ownership are declining industries. This goes some way to explaining the animosity between the two groups. As revenues are squeezed, each player has to work harder to cling on to margins.

Over 20 years the UK beer market has declined by about 1 per cent a year with sales of cask ale falling by 10 per cent each year since 1996. To cap it, both Scottish & Newcastle and Whitbread were ejected from the FT-SE 100 earlier this year.

Over at the pub companies, a similar story can be told. The City has lost interest in companies like Enterprise Inns, which owns 2,600 pubs. Its market capitalisation is £270m, which is low in comparison to its earnings, which have experienced a 28 per cent compounded rise over five years.

The market is being flooded with pubs for sale as former brewers like Whitbread switch to more profitable markets like hotels. Mr Moulton says that 15 to 20 per cent of Britain's 65,000 pubs are for sale or about to come on the market.

The landscape of the beer industry changed in 1989 with a now notorious Monopolies and Mergers inquiry. The resulting "Beer Orders" forced brewers to break their monopoly on pub ownership and thousands of pubs were dumped on the market. It opened the door to companies like Nomura and Alchemy, which snapped up the pubs at bargain prices. They spotted that while pubs were an "unsexy" investment, they produced a steady future income that could be locked in now.

According to Ted Tuppen, chief executive of Enterprise Inns, the change in the industry created an "equilibrium in the market place between the brewers and pub companies".

So, does Interbrew's acquisition break this harmony and create an imbalance of power? Certainly, it will reduce competition, and that, in theory, could threaten smaller brewers. It also provides the scope for Interbrew and Scottish & Newcastle to ratchet prices.

But the brewers are quick to point out that on a pint of beer costing £2.04 the retailer makes 53p, while the brewer takes just 4p. The rest goes on delivery, pub overheads, VAT and duty.

Philip Malpas, director of communications at Bass Brewers, says: "Brewers do not control retail prices, retailers do. Retail prices have risen by 10 per cent in six years, while brewers' wholesale prices have fallen by 16 per cent."

In an interview with Brewers' Guardian this month, Interbrew's chief executive Hugo Powell says that increasing prices is not part of the company's strategy. "We have no business plan that requires price increases to survive. We will do it on efficiency."

The pub companies are worried that Interbrew's deal could lead to greater delivery costs. A hangover from the 1989 reforms is that the big brewers still deliver their beer - as well as their rivals' products - to the pubs. However, the pub companies fear that because the power is becoming concentrated in the hands of two brewers, they could squeeze out their rivals' barrels from the lorries.

Mr Hands says: "Interbrew won't want to increase competition by delivering rival brands. Interbrew will change its pricing structure. It will reduce the price of delivering large orders and increase the prices for smaller orders."

Mr Malpas says this claim is unfounded. "There is no scope for brewery-owned distribution operations to discriminate. A logistics operation providing secondary distribution for another brewer, wholesaler, or pub company, will deliver all beer, regardless of manufacturer."

The pub companies are clinging on to the hope that the Competition Commission will clip Interbrew's wings. Last week the commission warned Interbrew that it may have to either sell Bass, reduce its dominance in certain UK regions or tear up its distribution contracts. This would be a blow to Mr Powell, who is planning to float 25 per cent of Interbrew.

Interbrew won the bidding war for Bass by placing an unconditional offer on the table. It is thought that Bass's chairman Sir Ian Prosser, rather wisely, turned down a higher offer from Carlsberg, which was conditional on the deal receiving UK regulatory approval.

Stephen Byers, the Trade Secretary, will pass judgement on Interbrew's deal in January. Regardless, Interbrew claims that its December float is on track, although it may have to leave its newly acquired Bass operations on the shelf.

An Interbrew spokesman says: "The Competition Commission won't affect the initial public offering. The prospectus will deal with this issue."

However, it remains to be seen whether Interbrew can pull off its flotation while it has to exchange blows with such formidable brawlers as Messrs Hands, Moulton and Osmond.