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April 29, 2003

COMMENT: S&N – fewer pubs, more beer

S&N has long wanted to be a major international brewer. Adding Strongbow maker HP Bulmer to its portfolio won't harm this effort; nor will taking full control of Portuguese brewer SCC. However, these deals will barely dent the GBP2.1 billion pub windfall. S&N may want to use the rest of the cash to take control of its other international joint ventures.

S&N has long wanted to be a major international brewer. Adding Strongbow maker HP Bulmer to its portfolio won’t harm this effort; nor will taking full control of Portuguese brewer SCC. However, these deals will barely dent the GBP2.1 billion pub windfall. S&N may want to use the rest of the cash to take control of its other international joint ventures.


UK brewer Scottish & Newcastle has said that it plans to sell its 1500 pubs, worth £2.1 billion at book value. S&N will also buy out the 51% of Portuguese brewer SCC that it does not already own, buy HP Bulmer for £278m, and cut its dividend.


S&N is the last big player to offload its UK pub estate: other major brewers have already realised their core competency is in drinks. Given that S&N’s pub sales are holding up well despite poor economic conditions, it should have little trouble selling the division at book value.


The acquisitions also make sense. Despite recent financial woes, HP Bulmer is the world’s leading cider firm – and the global cider market has shown stronger growth in recent years than beer. S&N will be able to use its marketing and distribution clout to push Bulmer’s brands, as well as cutting costs.


Meanwhile, the Portuguese beer market grew at 2.5% a year in value terms from 1997-2002, compared to 2.1% for Europe overall. SCC had a market share of just over a third in 2002, a few points behind market leader Damm. This was down slightly on 2001 – but with full control, S&N may be able to reverse this trend.


However, these deals barely dent the £2.1 billion cash pile from the pub sale. With investors hostile to grandiose expansion schemes, there is pressure to use the money for share buybacks – but S&N’s management has long believed the group can benefit from further expansion.


There may be a middle ground. Many of S&N’s highest-growth businesses are joint ventures; taking control of these would increase growth prospects while reassuring investors that the company is not being reckless. With the remaining £1.5 billion from the pub sales, S&N could buy Carlsberg’s 50% share in their east European beer joint venture BBH. Regulators permitting, it could also buy out United Breweries, its partner in the high-growth Indian market.


Related research: Datamonitor, “The European Beer, Cider and FABs Market to 2007

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