S&N mounts legal challenge in takeover defence

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Scottish & Newcastle faces a tough battle to defend itself from the joint takeover launched by Carlsberg and Heineken. But today's announcement of a legal challenge to Carlsberg over alleged breaches of the shareholder agreement governing their 50/50 joint venture, Baltic Beverages Holding (BBH), suggests it will not be going down without a fight. Ben Cooper reports.

When Scottish & Newcastle (S&N) asserted earlier this week that "all options remain open" in its bid to stave off the attentions of Carlsberg and Heineken, it appeared some analysts clearly doubted the company's ability to repel the joint takeover bid.

However, the initiation this morning of legal proceedings by S&N against Carlsberg over the alleged breach of the shareholder agreement governing their 50/50 joint venture, Baltic Beverages Holding (BBH), changes the picture somewhat, and may prompt some reassessment of the brewer's position among the investment community.

S&N has formally requested a tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce to confirm breaches of the agreement by Carlsberg and to confirm that Carlsberg is now obliged to offer its shares to S&N in accordance with the agreement.

The prospect of S&N launching a counter-bid for Carlsberg's 50% stake BBH had been seen as unlikely in many quarters, and doubts had been cast on whether S&N would be prepared to take legal steps to gain redress. It now appears that some may have underestimated S&N's resolve.

Matthew Webb, analyst at the stockbroker Cazenove, said today's move represented an "intensification" of S&N's defence strategy and provided further evidence of S&N's confidence in its legal position.

Where today's announcement leaves the Carlsberg/Heineken bid will probably become clearer over the next week or so. However, one important consideration is that even if S&N were to win the right to bid for Carlsberg's share of BBH, it would still have to come up with the money to finance it.

It has been suggested that it could do this in a number of ways, with the most likely being a combination of a major rights issue and debt secured against BBH's future cashflow. Another option would be a partial reflotation of around 30% of BBH following the acquisition of total control; if S&N floated off enough of BBH it might not have to launch a rights issue at all. The third option would be the involvement of a new partner but some have suggested this would leave S&N vulnerable to a takeover bid in the future.

S&N claims that under the "shotgun" clause, it can bid for Carlsberg's share of BBH at the same price that Carlsberg is effectively offering via the takeover. Webb suggests this is around GBP3.8bn which he believes undervalues BBH significantly. Some have put Heineken/Carlsberg's current effective valuation of the 50% in BBH even lower at GBP3.4bn, while Dresdner Kleinwort Wasserstein said it believed the stake was actually worth GBP4.4bn. As long as the bid remains at GBP7.20 a share, which values S&N at GBP6.8bn, Webb believes it is appropriate for S&N to continue to consider this option.

Analysts have repeatedly suggested that S&N shareholders are unlikely to back a rights issue when a cash offer - quite possibly improved from the original 720p per share - is on the table. But a source close to the deal suggested to just-drinks that analysts have over the years consistently under-estimated the performance of BBH, raising the possibility that other means of finance might be sufficient to make a rights issue unnecessary.

Meanwhile, the bidders will now surely aim to put pressure on the S&N board by stressing the potential damage to both S&N and BBH of a protracted legal battle. The most compelling way to short-circuit those proceedings, however, would be to persuade S&N to relent by upping the bid. It follows that if an improved offer had already been predicted before today's developments, the latest twist makes it all the more likely.

Most analysts thought from the outset that the GBP7.20 per share offer was on the low side. "We continue to believe that the management of SCTN [Scottish & Newcastle] will be able to generate c.800p of value for shareholders, most likely through encouraging a bid from the Carlsberg/Heineken consortium around that level," Webb said in a note.

Jens Houe Thomsen, analyst at Jyske Markets, said earlier in the week that he believed an increased offer would be forthcoming, S&N would accept it and the deal would be done by Christmas. Thomsen said he believed the upper limit on the eventual offer price would be determined by whether a counter-bid for S&N as a whole emerged, which was thought unlikely as a white knight might inherit a 50/50 partnership with a bidder it usurped. However, if S&N were somehow to gain 100% control of BBH, it becomes a far more attractive proposition to a rival bidder.

Webb believes that of the two candidates touted as possible white knights - SABMiller and Anheuser-Busch - SABMiller would only be interested if it could gain 100% of BBH, while A-B might be prepared to enter the fray under the current ownership structure.

It is little wonder that S&N has been so vitriolic about Carlsberg following the launch of the bid. Carlsberg certainly appears at the very least to have "outmanoeuvred" its partner. History will judge whether in so doing it has acted in an honourable manner. In the meantime, today's announcement serves to confirm that S&N aims to battle it out as long as possible and, arguably with some justification, eke every penny it can out of Carlsberg and Heineken.

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