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Both Heineken and Carlsberg this week said that they would focus on cost savings in 2009, as international beer markets struggle in the face the economic downturn. Michelle Russell looks at how both brewers have fared since their joint acquisition of Scottish & Newcastle last year.

Heineken and Carlsberg posted widely diverging impacts on profits this week while announcing plans to slash debt, costs and spending.

As the brewers that together bought and carved up Scottish & Newcastle last year prepare for a challenging and recession-hit 2009, many were left wondering whether the pair had bitten off more than they could chew.

Heineken saw its profit nosedive 74% to EUR209m (US$263m) on Wednesday (18 February), as it took a EUR757m charge to write down British, Russian and Indian assets.

The company, which brews beer under its own name and also owns Amstel said its main focus for 2009 would be cash generation and cutting costs "everywhere in the company".

It said that it no longer expects the S&N deal to add to earnings per share by 2012, as previously envisaged.

Some analysts said Heineken's figures were a mix of positives from its old business, including Nigerian expansion, and a "worse-than-expected" performance from S&N assets, principally in the UK, for which it appeared to have overpaid.

While Heineken missed analysts' profit forecasts due to the write-down costs, meanwhile, Carlsberg beat forecasts and saw its profit rocket.

The Danish rival more than tripled its net profit to DKR124m in the fourth quarter and raised its 2009 net profit target to more than DKR3.5bn.

Despite this, Carlsberg CEO Joergen Buhl Rasmussen echoed Heineken's cautious strategy for 2009. He said that the Danish brewer will focus on "increasing cash flow and protecting earnings, cost control, significantly reducing capital expenditure and accelerating debt repayment".

Trevor Stirling, beverage analyst at Sanford Bernstein, said that it was a "relief" that Carlsberg and Heineken's numbers weren't any worse for 2008, "particularly in the fourth quarter".
The two companies bought Scottish & Newcastle for GBP7.8bn in April last year, with Heineken chiefly to get the UK, US and Indian assets, while Carlsberg expanded in Russia by taking full control of Baltic Beverages Holding (BBH), as well as S&N's French, Greek and Chinese operations.

One analyst described Carlsberg's stock as a "bet on the Russian economy", while Stirling said the brewer's greater size in Russia gives it more scope than Heineken to weather the market's difficulties.

Carlsberg said that BBH, which operates in Russia via market leader Baltika, reported  largely flat volumes in the country for 2008, although higher priced brands, such as Tuborg, continued to grow.

In contrast, Heineken - the number-three brewer in Russia - was much more downbeat, calling the market 'bleak' as it wrote down the value of its Russian assets by three quarters.

Globally, both companies said that they were cautious about the development of beer consumption this year, after a number of markets slowed at the end of 2008.

Heineken faces particular problems in the UK, where the beer market shrank by 5.5% last year, hurt by a pub smoking ban and higher taxes, and has worsened as the nation slides into recession.

Heineken CEO Jean-François van Boxmeer this week insisted that its acquisition of most of S&N's mature Western European assets is not a source of regret.

"S&N gave us access to good beer markets where we have leading positions, number one or two. Human beings and beer brands survive recessions," the Financial Times newspaper quoted van Boxmeer as saying.

Both Heineken and Carlsberg said that beer consumption was "typically quite resilient" to recessions, though the Dutch brewer said downturns could spur a switch from bars to drinking at home and to cheaper brands.

Despite both brewers losing more than half their market value in 2008, Investec analyst Anthony Geard believes the brewers actually delivered "very resilient performances compared to competitors".

One such rival SABMiller, a company that chose to steer clear of acquisitions, reported an unexpected 1% decline in third-quarter beer shipments on 15 January, citing weakening demand in markets from Colombia to Russia.

Both Carlsberg and Heineken saw their stocks rise following this week's results.

Heineken's shares rose 2.3% to EUR21.48 while Carlsberg's rose 2.5% to close at DKK193.25 on Wednesday.

And so, for now, Heineken will concentrate on its new cost-cutting programme and seek to chip away at a EUR8.9bn net debt pile.

Carlsberg, on the other hand, has said it remains confident of BBH's continuing ability to increase market share and sees 2009 as giving opportunities in markets where it has leading positions, ie Russia.

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