The formation of a joint venture in the UK between S&N and Carlsberg has further strengthened the ties between the two brewers who already jointly own the Baltic Beverage Holding brewing operation. Olly Wehring takes a look at the UK initiative and examines its significance in relation to current merger speculation.

When two brewers get into bed together, the industry sits up and takes notice. And when one of the parties is the country's number one beer maker, attention among competitors in particular is likely to be heightened. At this stage, there is no suggestion whatever that this is a marriage-bed but that has not prevented the rumour-mills from stepping up a gear.

Of course, Scottish & Newcastle (S&N) - the aforementioned market leader - and Carlsberg-Tetley are already partners, in the form of Baltic Beverage Holdings (BBH) in Russia. But the announcement last week that the two are to embark on a joint venture in the UK has certainly sent ripples throughout the British brewing industry. With rumours abounding over the last three months that Scottish & Newcastle may be a takeover target, their partnership with Carlsberg will be closely watched.

The two brewers announced last week that they are to launch a technical support service for Britain's pubs and bars. The intention is to set up an independently-managed technical services company in the UK, called Serviced Dispense Equipment Ltd (SDEL), which will pool the technical services aspects for the British on-trade. In addition, a new service company, called Innserve Ltd, will be formed to manage the servicing and installation of technical services equipment on behalf of Serviced Dispense Equipment Ltd.

Both sides are quick to dispel talk of a potential merger, however. The speculation, allegedly stemming from analysts, led to S&N's share price rising considerably on Tuesday. Jeremy Blood, S&N's director of corporate affairs, dismissed the speculation as just that. "We have nothing to add on the matter," he told Just-Drinks.

Further underlining its stance, a spokesman for the company told The Financial Times last week: "It (the joint venture) is a particular solution for the UK market. We are still fierce competitors with Carlsberg." Andrew Caswell, strategic planning director at Carlsberg-Tetley, was equally dismissive of the rumours though interestingly only ruled out a merger at this time. "I don't think there's any likelihood of a merger at this stage," he told Just-Drinks yesterday.

Caswell was quite keen, however, to explain that the two brewers were looking to provide improved service to the UK on-trade. "There has been a one-stop shop for retailers in distribution for a while," he said. "About 18 months ago, retailers began showing interest in a similar arrangement for the technical service side.

As the competitive nature of brewing in the UK suggests, such a plan was never going to be easy to implement. "The brewers are very competitive," Caswell conceded. "It was never going to be the easiest thing in the world to put such a service into place." And yet the two seem to be headed in the right direction.

Two areas of difficulty await the new company, before it can begin operation, as planned, in the autumn of this year. First, there is the need for approval from the Office of Fair Trading. It is thought this will not be too difficult an obstacle though opposition from regulators in the past has limited attempts to consolidate the fragmented brewers market. Caswell believes the path ahead on this front is smooth: "We are confident it will pass the OFT," he said. A decision is expected in the next four weeks.

One other potential banana skin is the unpopularity that inevitable job losses will engender. "Limited job losses can be expected," warns Caswell. "We are currently in the process of consulting with our field work-force." Carlsberg-Tetley currently has its stores in Birmingham, but the new stores for SDEL will be in Sunderland, over 150 miles away, so some staff will be unable to make the move.

According to Caswell, the partnership was formed primarily in response to the breakdown of the vertical structure within the pub industry. But while structural factors may have been the catalyst, the result is that two existing partners have strengthened their relationship at a time when one is the subject of considerable merger speculation. It is little wonder that tongues are wagging.