Diageo and SAB Miller, two of the world’s most powerful drinks companies, have held detailed discussions with a view to breaking up Scottish & Newcastle, the British brewer that owns a half share in Russia’s largest beer business.
Work on the takeover has centred on a plan for SAB to bid about 710p a share for S&N — just over £9bn, including debt — having already put in place an agreement whereby Diageo would buy S&N’s UK beer business, which includes names like Fosters, John Smith’s and Strongbow cider, as well as Newcastle Brown Ale.
S&N’s Kronenbourg interests in France would be sold off, possibly to a private equity buyer, while SAB would retain control of S&N’s other international assets, such as a big stake in the Indian brewer, United Breweries, and a Chinese brewer called Chongqing.
Crucially, alongside rival Carlsberg, the move would also give SAB a 50 per cent stake in Russia’s Baltic Beverages Holding, which controls about a third of the Russian beer market.
The move appears to have been disrupted by the sharp appreciation of S&N’s shares over the past month, with speculation of an imminent takeover pushing the price above 600p at one stage recently.
Such speculation was widely dismissed as opportunistic rumour-mongering at the time — a view reinforced by comments at an SAB trading update on April 12, when Malcolm Wyman, SAB’s chief financial officer, described the west European beer market as “singularly unattractive.”
In fact, FT Alphaville has established that Diageo and SAB have been considering the joint plan, code-named Project Spice, for a number of months.
According to one financier with direct knowledge of the project, Diageo is code-named “Dill” in discussions, SAB is “Sage,” and S&N is “Saffron.”
For Diageo, which is understood to have hatched the idea of a joint bid in the first place, the move would allow it to radically enlarge its market position in the UK while bringing extensive opportunities for cutting costs.
Caught in a regulatory straight-jacket, specifically because of the size of its spirits interests, the financier suggested Diageo has actively considered spinning off its British spirits and beer business, including Guinness, into a separate company.
Working on the basis that S&N would cost more than £9bn in total, the plan envisages that once SAB has acquired S&N, Diageo would pay a little over £3bn for the British business, while the French business would be sold to a private equity buyer for a about £1bn, the financier said. That would leave SAB paying some £5bn to control S&N’s other international assets.
Yesterday spokespeople for Diageo, SABMiller and S&N declined comment on what they described as “market speculation.”