Once criticised for an over-reliance on mature markets, S&N has made some ground breaking deals this last year to bolster its growth potential. But as David Robertson reports, it still faces tough questions before it can claim its place at the top of the league.

Scottish & Newcastle will continue making acquisitions as it seeks to keep up with its larger rivals in the brewing industry although its significant debt load could still derail these plans.

S&N is already the biggest brewer in the UK but has aspirations to compete with the European giants Heineken and Interbrew as well as the new SAB-Miller combine.

"If you have scale you make more money in our business," said S&N chairman Brian Stewart last week. Stewart clearly wants to keep growing through acquisitions and indicated that he would use money from the imminent sale of part of S&N's pub division to finance deals over the next two or three years.

The company has already made a number of significant acquisitions this year. In January it bought a 40% stake in United Breweries in India. Stewart admitted to just-drinks that S&N has been considering a move into the subcontinent for many years but was worried that establishing its own operation could fall foul of complex tax regimes within the country.

In February S&N announced a deal with Hartwall in Finland which will make it the largest brewer in the country - that deal was confirmed last week when S&N took control of 97% of Hartwall shares.

S&N has a further partnership in the region with 50% of Baltic Beverages Holding - which has 32% of the Russian market. In March S&N unveiled another joint venture, this time with Mythos Breweries in Greece.

Add to these the deal struck two years ago with Danone to buy Kronenbourg and S&N now has three out of the top 10 brands in Europe. It is also number one in three of the six largest beer markets in Europe.

But with SAB and Miller Brewing joining forces and Interbrew buying Becks, the market seems to just keep moving ahead of S&N - try as it might it is not able to substantially close the gap on its rivals.

This has led to speculation that at some point in the future S&N may be forced to consider a merger with Carlsberg, which faces a similar dilemma. Both companies have a long and friendly relationship (Carlsberg owns the remaining 50% of BBH) and many analysts believe that it is the only deal that will really propel S&N into the top ranks of brewers, and maintain its independence.

"Stewart {said} he expected the relationship with Carlsberg to get closer "
Stewart told just-drinks that he expected the relationship with Carlsberg to get closer as they develop their joint ventures but refused to be drawn on the possibility of a future merger.

The main reason for all this interest in acquisitions at S&N is that its core UK market is largely stable - the company revealed turnover growth at its Scottish Courage division of just 1.3% cent to £2bn last year. S&N is gearing up for a substantial marketing campaign to consolidate that position, its marketing budget is being increased by 10%, but the company admitted that sales so far this year have been in line with expectation, ie not spectacular.

It was able to increase operating profits in the UK by 5.3% but part of this is due to cost cutting and part due to increased focus on the top brands - both finite strategies.

One of its truly innovative strategies has been the introduction of the patented Head Injection Tap, which was developed for Miller but will now be used for Fosters and Kronenbourg. Stewart told just-drinks that the system had been very warmly received by the trade as it produces a pint with a consistent head and retains the fizz longer. Stewart also indicated he would consider licensing the technology.

In comparison with the UK, international beer increased turnover by 2.9% and operating profits by 9.5%. Even without acquisitions there are plenty of opportunities for S&N organically and, Stewart told just-drinks, the company is looking at pushing Kronenbourg into the US this year and may distribute BBH or Hartwall beers in the UK. It has also started selling Fosters in France through Brasseries Kronenbourg. But to create massive growth in international sales the company must again come back to the question of acquisitions.

Expert Analysis

Europe Beer Report 2001

Detailed data from 1996-2006, covering production, import & export, brand consumption data, plus sales figures for the leading companies in the market.


If S&N is to do more Kronenbourg-type deals the major hurdle it faces is its debt. The company will pay Danone €2.3 billion in September as the final payment for the French brand and this has been covered by bank lending. But this will push group debt to nearly £3bn and give it a gearing of 90%.

Given the number of companies struggling with huge debt loads, created from seeking a deal too far (WorldCom and Vivendi most recently) investors might put the brakes on this strategy. Stewart will probably generate about £1bn from the sale of some S&N's pubs, while keeping management control, but this will not be enough to keep the debt from looking uncomfortably large.

But Stewart is confident that S&N will be a major power in the brewing industry. "We are looking at developing in international beer and if they're available, will look to be in a position to take advantage of acquisitions," he said. "Europe is a bigger market than North and South America combined. We want to get a grip on that market. There is a lot more to do, a lot more that can be added on."

Brian Stewart will step down from an executive position later this year and his successor, likely to be announced within a couple of months, will inherit this legacy - and its associated problems. Until the new man finds a solution the spectre of SAB-Miller will continue to loom large as a factor in S&N's future - as will speculation of a deal with Carlsberg.