S&N blames poor weather for weak trading in Europe

Scottish & Newcastle, the brewer fighting off a bid from rivals Carlsberg and Heineken, said yesterday it was to sell its French distribution business as it blamed unseasonable weather across Europe for weak trading in the third quarter.

The company behind Newcastle Brown Ale, Strongbow cider and Kronenbourg 1664 said that unseasonable weather had posed a particular challenge in France, where its core brands lost 0.5 per cent of their market share.

In an attempt to mitigate its position, S&N has agreed to a sale of Elidis, its French wholesale distribution business, to Centrale Européenne de Distribution for £85m. Noting that the division was an "ongoing drag" on performance, S&N's finance director, Ian McHoul, said the transaction would help to simplify the company's operations in France. S&N said it expected the division would make a loss of £12m this year, while the sale would have an immediate positive impact on profitability and cash flow.

The brewer also used the occasion of its third-quarter trading update to fire a shot at Carlsberg and Heineken, the continental rivals that have made a 750p-a-share approach. S&N said that the consortium had made a "wholly inadequate" offer, failing to recognise the true value of S&N's interest in Baltic Beverage Holding.

S&N, which is Carlsberg's equal partner in BBH, reiterated its determination to win total control of the prized Russian brewing operation. S&N has initiated arbitration proceedings against Carlsberg, claiming that the Danish brewer's part in the bid proposal breached a prior shareholder agreement between the two companies, thereby affording S&N the right to buy its rival's 50 per cent.

S&N's chief executive, John Dunsmore, said Carlsberg's move had left his company with no choice. "What Carlsberg has done is to make a long-term working relationship in the partnership untenable. Therefore we cannot return to the previous status quo," he said. "We believe we can prosecute these breaches and take control of BBH... be clear if we didn't think we had a good case, we wouldn't pursue this."

Trevor Stirling, an analyst at Sanford C Bernstein, said that a lot was riding on the outcome of the arbitration proceedings. "The result will be very important for Scottish and Newcastle. There are a number of questions to be answered: Will the court find in their favour? And if so, what price will they set for Carlsberg's shares in BBH? Scottish and Newcastle needs to be careful not to value BBH too highly, at the risk of its other Western assets," he said.

Mr Stirling also said that beyond Carlsberg, Heineken and SABMiller, the British brewing group which is also rumoured to be interested in S&N, other bidders may emerge. "Anheuser-Busch may yet emerge as a potential bidder. Also, it is entirely possible that we may see a bid from someone not in the beer market but with good contacts in the industry and an interest in the Russian assets – someone like Alfa Bank, perhaps."