Analysis – S&N takes its fight to Stockholm
This week is proving an eventful one in the battle for control of Scottish & Newcastle (S&N), with the UK brewer today making its official submission to the Arbitration Institute of the Stockholm Chamber of Commerce, which will consider if Carlsberg's involvement in the bid breaches its Shareholder Agreement with S&N governing its joint venture, Baltic Beverages Holding (BBH). Meanwhile, pressure is mounting on the consortium to increase its GBP7.50 per share offer, and an improved bid could be on the table by the end of the week. Ben Cooper reports.
The past few days have already seen some significant developments in the battle for Scottish & Newcastle (S&N), and the coming week could see a further critical turn of events, with analysts expecting Carlsberg and Heineken to raise their offer from GBP7.50 per share to around GBP7.70.
Speculation has been mounting that the bidders will raise their cash offer in order to entice S&N to the negotiating table, with some analysts believing that if the offer could then be pushed up to GBP7.80 it would be accepted.
The consortium is known to favour a recommended offer rather than making the bid into a hostile takeover. The UK's Takeover Panel has given the bidders until 21 January to table an official bid, and analysts believe that the consortium will have to have an improved offer on the table by the end of this week to meet that deadline for a formal bid.
According to a report in the Financial Times yesterday (7 January), shareholder pressure is mounting on S&N to look more favourably on even a slight improvement in the offer.
However, notwithstanding that pressure, S&N's resolve to defend itself has not wavered since the first indicative proposal was made late last year, and arguably grows stronger.
Today saw the publication of S&N's submission to the Arbitration Institute of the Stockholm Chamber of Commerce where it hopes to find legal recourse effectively to block the bid under the terms of the Shareholder Agreement between it and Carlsberg regarding ownership of their joint venture, Baltic Beverages Holding (BBH).
The submission hinges on three prime areas. It alleges that Carlsberg's decision to join in the takeover bid has breached confidentiality terms in the agreement, and damaged the joint venture by undermining both the ability of the partners to work together on all aspects of the BBH business as they had been doing previously, and BBH's relationship with third parties and suppliers.
Thirdly, S&N contends that the takeover bid represents an attempt to circumvent the 'shotgun' clause in the agreement which provides a mechanism for voluntary early termination by either company which is fair to both parties and minimises the disruption to the interests of the other partner.
S&N claims that Carlsberg has used confidential information on BBH in ways beyond those permissible under their agreement, and since being made aware of this misuse has taken no steps to rectify this. "Carlsberg continues to use the confidentiality clause to prevent S&N shareholders from having a summary of agreed information about BBH's future prospects, even though Carlsberg itself has breached that same clause," S&N said in its submission.
The submission also includes S&N's contention that under the terms of the agreement it believes it now has the right to bid for total control of BBH. "While the consortium continues to seek to acquire S&N's unique portfolio of assets on the cheap, we are continuing to explore fully every option to deliver shareholder value," said S&N's CEO, John Dunsmore. "Carlsberg's desire to terminate the BBH joint venture by circumventing the BBH shareholders' agreement provides a huge opportunity for us to take control of BBH through a successful arbitration process."
In making this claim, S&N has forecast synergies of around GBP100m (US$197.6m) per year, were it to take full control of BBH. The Arbitration Institute confirmed that proceedings had been initiated on 3 January, and is expected to make its final ruling by 3 July.
The Arbitration Institute's deliberations could of course be rendered moot if the bidders decide to raise their offer and this is accepted, and analysts believe that an increased bid is certainly likely.
"We continue to believe the next move will be a slightly increased offer for S&N from the consortium, from the current 750p to 765-770p," Cazenove analyst Matthew Webb was quoted as saying yesterday (7 January). Andrew Holland of Dresdner Kleinwort also believes a higher bid price of 770p or more will eventually be agreed.
In the view of some analysts, an initial increase in the offer would be sufficient to bring S&N into talks which could then see the offer rise sufficiently to gain acceptance. The Financial Times quoted an unnamed major S&N investor as saying: "Something in the 780-800p range would probably be enough to get majority control. I would have said GBP8 a few months ago but given the movement in the markets since, and evidence of poorer trading in the UK, I suspect a slightly lower bid would carry the day."
Meanwhile, Barclays Wealth analyst David Liston said: "It is probably inevitable that Scottish & Newcastle does accept a bid at some stage, and Carlsberg/Heineken only have to push it up a bit to succeed."
The degree to which today's Stockholm submission strengthens S&N's negotiating position is unclear. Bernstein Research analyst Trevor Stirling said: "I think S&N are doing the best they can to raise the stakes for Carlsberg and the consortium. This effort raises those stakes, but is not a knockout punch."
Given that S&N will have to wait until 3 July for any ruling from Stockholm, the deadline of 21 January imposed by the Takeover Panel seems rather more crucial. Indeed, analysts believe that the bidders will have to table some form of improved bid this week in order to allow time for a recommended takeover bid to be officially presented by 21 January.
Moreover, given S&N's comments in its submission regarding the damage this acrimonious affair is having on the ability of the partners to run BBH and develop strategy, the idea of it rumbling on until the Arbritation Panel reaches its conclusions will hardly be a palatable one for investors.
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