The UK-based brewer Scottish & Newcastle has announced that it intends to make a full disposal of its managed retail business of 1,450 pubs, restaurants and lodges. In addition S&N also said today that it was in advanced negotiations to acquire full control of the Portuguese brewer Sociedade Central de Cervejas (SCC) and that it had launched a takeover bid for the beleaguered UK cider producer Bulmer.
S&N chairman Sir Brian Stewart said: “The developments announced today represent important steps in the transformation of Scottish & Newcastle, and are in the best interests of all the Group’s businesses and its shareholders. Scottish & Newcastle will become a focused international brewer with a portfolio of strong brands and excellent distribution platforms in many of Europe’s best beer markets. The two developments announced today in Portugal and the UK demonstrate that there are many exciting and value-creating opportunities to strengthen our beer businesses.”
He went on: “The decision to sell our managed retail business is the right one for shareholders and the business. It has become clear in recent months that the managed retail sector is ready to undergo significant change and consolidation. By leading this process in a clear way, S&N will deliver most value for its shareholders, and offer Bob Ivell and his highly regarded management team the best opportunity to play a leading role in the future development of the sector.”
In December 2002, S&N confirmed that it intended to release capital from its retail estate through an ‘sale and manage-back’ agreement for part of the estate. In this structure the assets would have been sold outright with a grant back to S&N of a long-term management contract to operate the business on behalf of the new owners.
“Negotiations to conclude this agreement made good progress; a preferred party was chosen following a competitive process, due diligence was conducted and contract negotiations were effectively concluded at the top end of the range of values previously indicated,” the company said today in a statement.
“However, it has become increasingly apparent that a number of credible and well-funded groups have an interest in investing in managed retail estates, thus stimulating a new phase of consolidation. In these new circumstances, the board believes that the best option to maximise value for the shareholders of S&N and to optimise the growth prospects of the managed retail business is to pursue actively a disposal of the whole business,” it said.
The intended disposal of the managed retail business will be effected through an auction, managed by S&N’s advisers, Deutsche Bank and UBS Warburg, starting immediately. Though the disposal will require the approval of S&N’s shareholders in due course, completion is targeted before the end of 2003.
S&N said that it is intended that a supply contract will be negotiated as part of the disposal.
“The proceeds from this disposal will have a significant effect on the capital structure of the business. By reducing net debt the disposal will provide additional flexibility in financing the development of the beer business both in the UK and internationally. The board remains committed to maintaining an efficient capital structure, and will take appropriate actions to maintain this efficiency,” S&N said.
The company believes the disposal will be earnings dilutive, but will enhance the group’s free cash flow. In the year to April 2002, the current estate of S&N Retail generated EBITDA of £272m on turnover of £1,009m. The current net book value of the managed retail business is believed to be around £2.3bn
In an additional development S&N also announced two acquisitions, which it said it expected to be earnings enhancing in the first twelve months of ownership. In the first instance it has launched a takeover of the cider producer HP Bulmer. The boards of the two companies have agreed on the terms for a recommended cash offer of 310p per ordinary share of Bulmer.
Bulmer, the UK’s leading cider company with a 53% share of the cider market, produces brands including Strongbow, the UK’s leading cider brand. However it has struggled in the last 12 months, issuing a number of profit warnings that have led to job cuts, the resignation of senior board members, including the CEO, and a plummeting of the company’s share price.
However S&N said: “The acquisition of Bulmer will create many opportunities to enhance the performance of Bulmer’s brands by marketing and selling them as part of Scottish Courage’s portfolio of leading brands. In particular, Scottish Courage plans to build further on Strongbow’s strong growth in the UK market. In addition to the £6m of savings already announced as part of the existing management’s turn-around plan, the acquisition will result in significant cost efficiencies, currently planned to be at least £10 million per annum.
S&N is also in advanced negotiations to acquire full control of SCC, the Portuguese brewer and distributor, in which the company currently has a 49% stake. S&N intends to acquire the remaining 51% stake in the business from its joint venture partners.
The talks also see S&N in discussions to acquire the associated water business – SAL. SAL is a leading producer of branded mineral and spring water, including Luso, the number one bottled water brand in Portugal. S&N said that SCC and SAL were already considerably integrated operationally, with SCC taking responsibility for brand marketing and on-trade distribution.
“This acquisition will be a logical evolution of a very successful joint venture partnership. Since the joint venture formation nearly three years ago, the SCC business has performed extremely well, under a strong and committed local management team. The investment in Portugal demonstrates the success of S&N’s strategy of working alongside local partners and investing in businesses with strong market positions, strong brands and effective distribution,” the statement said.
S&N also used the announcement to update on its trading, which it said, for the year to end April 2003 has continued to be in line with expectations across the UK managed retail business, the UK beer business and the international beer business.
In particular, in UK Beer, trading and the restructuring of the distribution chain continues in line with the update it gave in February, S&N said.
Its East European operation BBH also continues to perform well, it said, although first quarter performance will be affected by strong comparatives last year and the reorganisation of Baltika’s supply chain.