Dutch brewer Heineken has denied that theInterbrew/Whitbread tie-up has left it vulnerable in the UK market, leaving it no choicebut to buy Bass Brewers at any cost.

"Bass is not a must buy, even afterthis deal. As our licence agreement with Whitbread PLC remains unchanged, the structure ofthe European brewing operation is unchanged. The volumes of Heineken and Stella Artoiswill continue as the same rate, so the UK market share and the European brewing rankingstays the same," Heineken spokesman Albert Holtzappell told just-drinks.com.

He also said that Heineken's corporatestrategy was to "only acquire ventures which would enhance shareholder profitabilityin the mid-term", something Bass would not do if the price reaches £2 billion orover. "Bass will give us broad leadership in Europe, but not if the premium is toohigh," he said.

Analysts, however, see Heineken's long-termfuture in the UK and its dominance in Europe hinging on the Bass deal."Realistically, Heineken must get Bass. Its brands are in reverse in the UK and theHeineken brand image is tarnished," said a leading drinks analyst.

Around 2m hectolitres (hl) of Heineken ColdFilter is brewed in the UK, a substantial amount for both the Dutch producer and Whitbreadto lose. Roel Gooskens, analyst with Dutch investment bank ABN-Amro, said:"Heinekenhas to work with them. It has no choice. It cannot terminate a contract which generatesthose kinds of volumes."

He believes a workable relationship betweenInterbrew and Heineken could exist. "Though the brewers always say they arecompetitors, deals can be done. Heineken brews Guinness in the Far East and it has justannounced it will brew Grolsch while its brewery is out of action after the fireworksdisaster.

Heineken will sort something out. It willbe interesting to see whether Interbrew and Heineken split the brewing activities ofWhitbread; one half Stella Artois, the other Heineken Cold Filter," he said.

Industry sources believe that Interbrewbegan talks with Whitbread around four months ago in which time no other brewers have beeninvolved in serious talks with the UK brewer.

This apparent lack of interest in Whitbreadby Heineken will take many industry watchers by surprise given the threat to the Dutchbrewer's stability that an Interbrew controlled Whitbread poses. Heineken and its Murphy'sbrand are currently brewed under licence by Whitbread in the UK.

The UK is the only developed market, evenincluding its home market of Belgium, where Interbrew's Stella Artois brand is stillshowing strong growth. It is highly likely therefore that Interbrew will enter this newphase of its UK history very aggressively. It is difficult to understand how Heineken willbe anything but marginalised (through the sheer lack of resources) by this process.

Despite the tone of the official linereleased yesterday, that Heineken will continue to be brewed under licence by Whitbread,sources close to the deal say that the Dutch brewer will not remain in the same portfolioas its rival Stella Artois.

Heineken's deal with the UK company wassigned with Whitbread PLC not Whitbread Beer Company, and under the terms of the newagreement this has not changed. Heineken will continue to be brewed at property leased byWhitbread PLC off what is now Interbrew UK by Whitbread PLC employees.

It is generally understood that Heinekenwas unhappy with the job Whitbread had done with its brands - Heineken lager and Murphy'sStout - in the UK. The uncomfortable relationship has only been compounded by the arrivalof Interbrew, Heineken's arch-rivals, at the Whitbread wheel.

Heineken licence agreement to bereviewed in two months

Heineken has only two months to decide onthe future of its brewing industry in the UK, according to industry analysts.

Under a temporary agreement with InterbrewUK, the new owners of Whitbread Beer Company, who brew Heineken in the UK under licence,the lager will continue to be produced at the company's, Salisbury and Magor breweries.

Meanwhile staff from Whitbread Beer Companyare all being transferred to Interbrew UK except those needed to continue to produceHeineken, who will remain as employees of Whitbread PLC.

However, worryingly for Heineken this dealwill run out in two months. Interbrew will then call time on the Heineken operations atMagor and move all Heineken brewing to the Salisbury plant. Furthermore it will alsoenforce a renegotiation of the staffing situation by absorbing all remaining Whitbreadstaff involved in brewing into Interbrew UK.

It is presently unclear what the terms ofthe renegotiation will take and what the implications will be for Heineken.

The UK market is crucial for Interbrew. Itis the largest market in the world for the Stella Artois brand, having overtaken Belgiumin 1997.

Prior to the Whitbread deal it wasInterbrew's fifth most important market (after Canada, Belgium, Russia and the USA)andsince the acquisition of Whitbread it will become Interbrew's second most important marketin volume terms (after Canada).

"Interbrew had to protect StellaArtois as the UK market is key to its growth. The only drawback is that it was not one ofthe big, top four brewers and meant Interbrew was only buying into its existingdistribution network," said Kevin Baker, beer analyst at UK research agency Canadean.

Europe's brewing structure, according toCanadean, has changed. Heineken remains leader but Interbrew now jumps over Carlsberg tobecome number three (see table below).


Leading Brewers In Europe, 1999E

HEINEKEN (1) 48.0
INTERBREW (2) 22.3
BASS 18.9
BBAG 9.2
(1) Includes acquisitions in Spain and Poland
(2) Includes acquisitions in Russia
(3) Includes acquisition of Pilsner Urquell/Radegast
Source: Canadean

Leading Brewers In Europe Following S&N Acquisition Of Danone and Interbrew's Acquisition Of Whitbread

BASS 18.9
BBAG 9.2
Source: Canadean

ElliotLane and Chris Brook-Carter