The UK's largest brewer Scottish & Newcastle announced today that its UK business, Scottish Courage, plans to close the Fountainbridge Brewery in Edinburgh and buy the smaller production unit of Caledonian Brewery as a dedicated ale brewery for Scotland.

Scottish Courage intends to close its Edinburgh Brewery at Fountainbridge, with effect from December 2004.

The company said that against a background of the mature and competitive UK beer market, a priority for Scottish Courage in 2004 is to reduce costs in the UK business.

"There are a number of factors, including the Fountain Brewery's high fixed operating costs, low capacity utilisation, and City centre location which combine to mean that continued production from the site is no longer commercially viable," a statement said.

It is anticipated that the closure will result in 170 job losses at the site. Affected employees will be offered retraining, relocation opportunities within the Group or redundancy compensation.

Production of the McEwan's ale brands will remain in Scotland, and will be brewed in Edinburgh at the Caledonian Brewery. Lager production will be transferred to other Scottish Courage breweries in the UK.

Meanwhile, Scottish Courage has entered into an agreement with the Caledonian Brewery Limited, in which Scottish Courage will acquire the brewery in Slateford Road, Edinburgh. In addition Scottish Courage will use its distribution strengths by selling the Caledonian brands in the UK off-trade as well as taking the rights to sell the brands internationally.

At the same time, Scottish Courage will take a stake in a new business - Caledonian Brewing Company, formed by the current Caledonian management team, which will develop the Caledonian beer business in the UK on-trade market.

It is anticipated that all existing Caledonian employees of Caledonian Brewery Limited will transfer into the new company, which will be managed by Stephen Crawley, currently Managing Director of Caledonian Brewery Limited.

John Dunsmore, chairman and managing director of Scottish Courage, said: "As part of the ongoing review of the UK business, we investigated a range of options to allow us to keep the Fountainbridge Brewery open. Unfortunately, none of these options proved viable and it is with regret that we announce today our intention to close the brewery at the end of this year.

"Our Fountainbridge employees have made a significant contribution to the company and our priority is to support them fully over the coming months."

"The acquisition of the Caledonian brewery site and its enlarged future as a dedicated Scottish ale brewery is good news for McEwan's and Caledonian ale brands. We look forward to working in partnership with Caledonian."

Stephen Crawley, managing director of Caledonian Brewery Limited, said: "Caledonian shareholders and the management team are pleased with the new partnership. It will enable the Caledonian Brewing Company to concentrate on developing the huge market potential for our award winning ales in the UK on-trade, while Scottish Courage's distribution power will help our ales to enter new markets in the off-trade and internationally.

"Scottish Courage will bring new investment and security to the Caledonian brewery and I know that this will provide the best possible new home for the historic McEwan's and Caledonian ales. While it is very much business as usual for us, we look forward to working closely with the Scottish Courage team as the new business takes shape."