By acquiring Holsten in Germany, the Danish brewer Carlsberg hopes to set a base to expand its flagship brands into the largest market in Europe. But concerns abound about the prudence of the deal and whether the money would have been better spent elsewhere. Chris Brook-Carter assesses the strategy.

With annual consumption of more than 100m hectolitres, Germany is not only the largest beer market in Europe but - behind China and the US - the third largest in the world. When combined with the fact it is ripe for consolidation, being home to one of the most fragmented beer industries in Europe, it is clear why the large international brewing concerns have been circling above the country for some time now.

Interbrew and Heineken have already made important investments in Germany and it should have been no surprise when their Danish rival Carlsberg announced last week that it was bidding to become the latest international to make an acquisition.

The fact that it was offering to acquire Holsten-Brauerei AG, for a total enterprise value of €1,065m, was more of a surprise. Holsten, after all, had said in December that it had abandoned its strategic search for a buyer.

But, Holsten's change of heart aside, the deal has still raised more than its fair share of eyebrows, in particular concerning the strategic prudence of Carlsberg's actions.

"I think it will be a tough call for Carlsberg to make this an attractive investment," one analyst who follows Carlsberg told just-drinks.

Carlsberg Breweries plans to acquire 51% of the share capital in Holsten at €38 per share from the Eisenbeiss family and other parties, and then make a voluntary public offer at the same price to buy all outstanding shares. It will also take on Holsten's debt.

At the same time, an agreement has been made to sell the breweries of König-Brauerei in Duisburg and Licher Privatbrauerei in Lich to the Bitburger Group at a price of €469m. Furthermore, Carlsberg has been granted an option providing Holsten with the right to sell its 65% shareholding in its mineral water business at an implied enterprise value of €159m.

This means Carlsberg will be in a position to on-sell assets at a total enterprise value of €628m, over half the total value of the original outlay for the deal.

It looks like a clever move by Carlsberg, who will pay a reasonable €437m for what it wants, instead of €1.1bn for everything. The total cost is far from excessive, particularly when the synergies Carlsberg hopes to achieve are factored in - revenue and cost synergies are expected to be €7m in 2004, €14m in 2005 and €17m in 2006.

Following the divestments, Carlsberg Breweries will be the leading brewer in the north of Germany and the 5th largest brewery group in Germany.

The Danish brewer also hopes that this market-leading placement in the north will become a natural extension of Carlsberg Breweries' leading position in the Nordic region. It expects to use this strength as a base from which to grow its international flagship brands Carlsberg lager and Tuborg in Germany.

"An important strategic goal of Carlsberg Breweries is to strengthen and develop its main brands, particularly the Carlsberg brand. Holsten's strong distribution network and sales force in Germany offers a platform through which the Carlsberg and Tuborg brands will be able to expand," the company said when announcing the deal.

"In addition, Holsten's existing international presence will further enhance Carlsberg Breweries' export and licence business. By including the Holsten brand in Carlsberg-Tetley's distribution network, the UK business will be strengthened," it added.

The key here is Carlsberg's caution. In one press interview this week, Carlsberg chief executive Nils S. Andersen said: "We're really not trying to build market share in all of Germany. That would be far too expensive."

He added: "We don't have aggressive plans for growing our market share in Germany, but we have aggressive plans for becoming more profitable in Germany."

Despite this caution, and the reasonable price tag, concerns still abound. Interestingly, opposition comes from two polar fronts - those who feel Carlsberg has not gone far enough and those who worry that Germany is not a good investment, full stop.

By selling on a number of Holsten's local brands, some feel Carlsberg has missed an opportunity to become the German number two. Instead, it has settled for the number five slot and leadership only in the north of the country. However, as Carlsberg's aim is to grow its international brands, keeping local brands such as Koenig and Licher makes little sense anyway.

Of more concern is the idea Carlsberg has made an error in looking to Germany at all as an investment market.

"They (Carlsberg) could have found some more attractive investments in the growth markets, the emerging markets," the analyst told just-drinks.

She said: "Carlsberg is always evaluating possible takeovers on different markets. But if you look at what would create most value for the shareholders, I believe that in this case, it would have been better to focus on growth markets."

Germany is a tough market with no growth and hard price competition and, even though in northern Germany the consumers are more interested in international beer brands than the rest of the country, it will still be a challenge for Carlsberg to find a good position for its premium brands on the market.

In 2002 consumption of beer in Germany fell by 1%, continuing a long-term decline fuelled by consumer trends to drink more healthily. But the figures for 2003, when they come in, are expected to be far more disheartening, following the introduction of mandatory deposits on packaging in January last year.

A recent report from industry analyst Canadean said that over-capacity among Germany's beer makers is now a critical issue, estimated at 30% across the industry and 50% in many small to medium-sized breweries.

On top of this, Germany's beer market is still very diverse, with some 5000 different beer brands and a great variety of types. "Very few brands can be classified as national," said the Canadean report.

The thought, then, of expanding the Carlsberg brand slowly into the rest of Germany, using the Holsten distribution network, makes even less sense to the company's critics.

"I think they have a strong brand in the Carlsberg brand but I also think it will be tough to convince the Germans that they should drink Carlsberg and Tuborg," the analyst said.