Analysis - Heineken's deal with United Breweries

Heineken's deal to end the confusion surrounding its India business has few short-term financial advantages, but positions the brewer nicely for an expected Indian beer boom.

Heineken has reorganised its India and Asia businesses, chief among the pile being its deal to secure a 37.5% stake in United Breweries and take three seats on the brewer's board - including the key chief financial officer post.

Analysts were largely positive about the move, which clears up Heineken's dispute with United Breweries and also gives the Dutch brewer control of Asia Pacific Breweries' India business.

Heineken is taking an educated bet on India's beer market.

At a time when beer markets from New York to Moscow are battling against stagnation and a fall in consumer spending power, India has continued to show promise.

The problem is that India's beer market remains a dot on the horizon: volume sales rose by 28% in 2008 to 1.36bn litres, according to figures from global research group Mintel. Those compare to a UK market down 11.5% in 2008 but still at 4.78bn litres.

Compared to spirits, beer remains an expensive way to drink in India and is largely confined to big cities. There are also interstate regulatory issues that plague all drinks sectors in India; for beer, the current hotspot is Andhra Pradesh.

In the short-term Heineken has secured, but not increased, its stake in United Breweries and the company may be a large fish - controlling an estimated 50% of the Indian beer market - but everything is relative.

Analyst group Sanford C Bernstein said today that the Heineken deal "is near-term earnings neutral and does not increase its share of future profits from India".

It added: "Probably the most significant aspect is Heineken's ability to exercise some influence on the future path of United Breweries, whereas before it has purely an economic stake."

This could prove highly significant if India's beer market expands as many believe it will.

"Beer should be the national drink of India, if it gets more affordable," said Indian-born Lord Karan Bilimoria, founder of Cobra beer, in an interview with just-drinks published last week. 

India's beer market is set to expand by around 6% in volume terms in 2009, according to Mintel. After that, annual growth is likely to be double digits up to 2013, between 10% and 13%.

Half of India's 1bn population are believed to drink alcohol.

However, the country's gross domestic product (gdp) is expected to grow at 5% in 2009, slower than previously anticipated, according to the Economist Intelligence Unit.

"We have long regarded a strong Indian presence as important in order to increase our exposure to and growth from developing markets," said Jean-François van Boxmeer, Heineken's chairman and CEO, following today's deal.

United Breweries has outperformed its main rival, SABMiller, in 2009. In its third quarter to the end of September, United Breweries reported sales up to INR4.12bn (US$88.7m), versus INR3.66bn in the same period of last year, with volume sales growing ahead of the market.

SABMiller saw beer sales by volume slip 21% in India in the six months to the end of September.