The sale of S&N Retail was as inevitable as it was sensible, but life after the pubs has created as many questions for the UK's number one brewer as it has answers. Chris Brook-Carter wonders how S&N will fare now it is finally a fully focussed brewer.

In acquiring Kronenbourg in 1999, the UK's largest brewer Scottish & Newcastle effectively sealed the fate of its UK retail division. The move was seen as a commitment to growing its global brewing business, a goal that was commonly believed to be mutually exclusive from continuing to run its UK pubs.

The logic for the sale was compelling. It was asserted that the company was spending too much management time, resource and finance in tidying up its UK pub operation. With many of its competitors on the international brewing scene investing enormous amounts of money in brand building, S&N's pub operation was draining financial resources that would otherwise be directed towards brand development and international acquisitions.

Why then when the company agreed the sale of S&N Retail last week to the consortium Spirit Amber, was S&N's future greeted with such caution by the markets? Indeed such was the frosty nature of the reception by a number of investment banks that at one point S&N's shares had fallen 9p to 347p.

There are of course fears from some quarters that S&N may have been hasty. The retail division after all gave the company an ideal route to market and with decent brewing acquisitions getting increasingly more expensive, vertical integration may not always be considered the financial faux pas it currently is.

But the distribution deal S&N secured with Spirit Amber as part of the sell-off counters this problem. And the volumes generated through the pubs were a fraction of total UK revenues anyway.

Few doubt that S&N has done the right thing by selling the retail division. "It's definitely a positive," one analyst told just-drinks.com. "The retail division was a drain on cash flow. They can now pay down a significant part of their debt and make a few value adding acquisitions."

The real problem is that while S&N 'the pubs salesman' is being seen in a positive light, the move has done little to shift the perception of S&N 'the brewer' as a poor relative to its international competitors.

Indeed, if anything, the sale has highlighted S&N's problems by stripping away the pubs as an excuse to why the company was not fulfilling its international aspirations. The sale has laid the business bare to some difficult questions about its strategic future.

The worries are that while S&N's aspirations may be international it is still - with the exception of a 50% stake in the Russian brewer BBH and a good business in Portugal - primarily a national business that operates in the mature markets of the UK and France.

"How are you going to create shareholder value growth from markets that operate low growth and negative profit dynamism," said the analyst.
There is of course some ability to make acquisitions. Tony Froggatt, chief executive has already hinted at his desire to go after smaller scale deals. "We are talking about spending hundreds of millions of pounds rather than billions," he said.

And analysts have pointed to Spain as the most obvious target, including Mahou and Damm. S&N could combine either of these operations with its Portuguese business to achieve some useful synergies. But Damm, in particular, is trading at a high multiple and at the current price it may not be value enhancing.

There are breweries available to S&N in Germany also, but here the problem would be finding synergies with current S&N operations, a problem that is mirrored across other potential investment markets around the globe.

And as the analyst told just-drinks, in terms of value-adding acquisitions, "where S&N operates there is very little that can be done."

In short, the real issue is whether S&N is arriving at the great global consolidation party too late, with all the best beer gone and only a half empty fridge of unwanted brands left to drink. Furthermore, despite the sale of S&N Retail, the basic financial position of the company has not changed, meaning it may not even be able to outbid its rivals for these slim pickings.

"Even after the disposal of its pubs business their [S&N's] debt ratios are poor compared to Interbrew and Heineken," said the analyst.
So if Froggart cannot buy his way to a place at the top table of brewers, will someone already there invite him to join them, by means of a takeover.

Certainly, with the disposal of the retail division, the new slimed down S&N will be significantly more attractive to potential suitors. However, the analyst believed only SABMiller would be interested and capable of such an acquisition given any such deal is likely to attract the interest of the UK's competition authorities.

And given that SABMiller is still struggling to digest its acquisition of Miller Brewing from Philip Morris, any such deal is likely to be sometime off.

Another possibility is some sort of joint acquisition, perhaps between Carlsberg and Heineken, with the two companies splitting the spoils. Though no doubt a complex deal - ruling it out as a short-term possibility - it would be value enhancing for both parties, the analyst believed, with Heineken interested in the Portuguese business and Carlsberg no doubt eager to capture the remaining 50% in BBH which it doesn't already own.

One way or another, a sale was likely eventually, the analyst said, as S&N "doesn't seem to have strong prospects on its own."