S&N says 'nothing is sacred' in profit push

By Neil Merrett

- Last updated on GMT

Related tags: Takeover, Newcastle brown ale, Scottish & newcastle

Scottish & Newcastle (S&N) today said that no part of
its operations are immune from restructuring designed to drive
greater value from its beer brands, part of the company's bid
to fight off a takeover offer by two rival brewers.

In the group's third quarter trading statement, S&N said that offloading its France-based wholesale operations and restructuring production and packaging in the UK would ensure it can continue to offset a market slump in Western Europe over the coming year. The update comes as the group continues to fight off a hostile takeover of its operations from Carlsberg and Heineken. The two brewers want to split up the group's operations between themselves. S&N says the latest offer from the two rivals, which value the company at €10.2bn, still fails to reflect the true value of its operations. The brewer's management claimed that the latest proposals for production and distribution of the company's brands would vindicate their decision to oppose the sale. As part of its focus to ensure a leaner more profitable company, S&N said that "nothing was sacred" when it came to restructuring. Restructure plan ​ In France, S&N announced it has agreed to a deal with Centrale Européenne de Distribution - the country's largest market wholesaler - to sell of the majority of its national on-trade distribution business. The deal, valued at about £85m, is expected to create an instant positive impact on both profitability and cash flow according to the company, when it is expected to be completed during the first quarter of 2008. Through the brewer's UK operations, which have accounted for 60 per cent of S&N's income during the last three years, the company has announced a number of measures it expects to improve both profitability and market share. These proposals include a production and packaging agreement with the UK-arm of Molson Coors to outsource 3m hectolitres of on-trade beer production under contract. S&N said it would begin negotiations with staff over these cost-cutting measures. Another part of this focus will result in the formation of a new joint venture with Herefordshire-based the Q-Group over construction of a new 1m hectolitre cider mill, which will expand the company's total output of the product by 25 per cent. The venture will be supported initially by a ten-year contract that the brewer says will secure the required capacity for increased cider production without the cost of single-handedly amending its existing site. As well as beverage production, S&N said it had also decided to amend how its goods were packaged by announcing the closure of its bottling plant in Berkshire. The remaining volumes from the plant will be packaged at the company's plant in Tadcaster instead. Packaging and warehousing for the international export of its Newcastle Brown Ale brand will be outsourced to the Quinn Group in Cheshire. The group expects the changes to generate £20m in costs by 2009. To expand the group's focus on higher value premium ale brands and second tier cider products, a further joint venture with Heritage Drinks Limited was also announced to ensure sufficient marketing and production of the goods. Company chief executive John Dunsmore said the group's focus on improving value within its brands had already proven to be key driver in growth for the company's UK operations, where it claims to be market leader for beer production. "We have leveraged a 26 per cent beer market share to grow our share of theUKmajor brewers profit pool from 46 per cent to 60 per cent in the last three years,"​ he stated. With these proposals now in place, the company said it anticipated an improved performance through both its Western European operations and the Baltic Beverages Holdings (BBH) joint venture with Carlsberg. "While we foresee a significant rise in input costs, we expect to mitigate this through material price increases combined with cost reduction plans," the company stated. Increased offer ​The restructuring plans by the brewer come amidst continued pressure by their rivals to sell up. S&N last week rejected a sweetened takeover offer from Carlsberg and Heineken, indicating that the company's executives are in no mood to relinquish control. Carlsberg and Heineken raised their initial offer to 750 pence per share, valuing Scottish & Newcastle at £7.3bn (€10.2bn). "The board, having consulted its advisers, has no hesitation in rejecting this wholly inadequate proposal as it substantially undervalues the unique strengths and market positions of S&N,"​ the UK-based company stated. The board also said members were "particularly concerned" by Carlsberg's continuing refusal to disclose relevant information about of Baltic Beverages Holdings, the jewel in the crown. S&N and Carlsberg jointly own Baltic Beverages, which has turned into a lucrative money spinner as the Eastern European market explodes into growth. The takeover bid has left one of the fastest growing Eastern European brewers up for grabs, highlighting the possible difficulties in operating a company with an industry rival. Under the original offer, S&N and its stake in Baltic Beverages would have been valued at £6.8bn (€9.7bn). However, S&N rejected the bid outright and announced its own plan to keep its stake of BBH and replace Carlsberg with a new partner. Carlsberg and Heineken first announced last month that they had formed a consortium to purchase S&N. In a joint statement, the potential buyers said that should a deal go ahead, they would look to split the group's regional operations between themselves. Through this plan, Heineken would control S&N's Western European operations, including the UK market, while Carlsberg would claim full ownership of the Baltic Beverages. During the first quarter of the year, BBH posted a 37.1 per cent increase in net sales to €1.3bn during the first half of the current fiscal year, resulting from its continued expansion into the region.

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