SBHD: Having survived a hostile takeover bid seven years ago, Scottish & Newcastle’s longer term view of the industry is now literally paying dividends. By George Pitcher
Scottish & Newcastle has always been incorrigible, even by the standards of the very individual management styles within the brewing industry.
I remember talking to S&N chairman and chief executive Alick Rankin at the height of his resistance to the £1.6bn takeover bid by John Elliott’s Elders IXL in 1988. I suggested that S&N’s shares were underrated by the market.
“I think that’s a bit rude,” barked Rankin. Now, anyone with a rudimentary knowledge of City ratings (as I had) would have known I had bowled Rankin a softball. If S&N was underrated, then its shares were cheap. If its shares were cheap, then Elders’ offer was a steal. If the offer was a steal, then shareholders had a brighter future sticking with S&N.
But that was not the way Rankin liked to play. To him, S&N was a great company, with a great future and that was why shareholders should stay loyal. More mealy-mouthed interpretations could be left to the City of London.
Australian brewers, it must be said, have not had a great record against British tycoons. Who can forget Tiny Rowland (yes, he is a British tycoon) despatching Alan Bond, brewer of the ubiquitous Castlemaine, with the pay-off “Love, Tiny, XXXX”.
And S&N saw off Elders.
Today, S&N is preparing to acquire Courage from Elders’ erstwhile flagship Foster’s, thereby becoming Britain’s largest brewer, ahead of the mighty Bass.
Apart from congratulating S&N, which we undoubtedly should, some broad, industrial points arise out of this deal. We have come a long way since Lord Young, Trade Secretary back in the high summer of Thatcherism, was “minded” to accept Monopolies & Mergers Commission proposals that brewers’ monopoly supplies to the tied trade should be broken.
Young subsequently backed off – it was intimated at the time that the awesome “beerage” turned the screw on Central Office – but the process he had put in place started a rationalisation within the brewery and licensed trades that has encouraged the kind of big deal we are witnessing this week between S&N and Courage.
S&N was comparatively less at risk from the threat to tied houses, but it spotted where the market was going. The hybrid version of the Beer Orders that eventually appeared forced the on-trade to address the ownership of pubs. The answer for brewers was to impose new draconian leasehold contracts on publicans. Pubs started to go under; the majors were rationalising.
The solution for a heavily regionalised player such as S&N has been to establish a national presence, with effective vertical integration into brewing to match the new environment. Meanwhile, heavily-spread national majors such as Bass and Grand Metropolitan have struggled to meet regulatory requirements.
So it was that a couple of years ago S&N raised £405m from a rights issue to subsidise the £700m purchase of Chef & Brewer from Grand Met. This brought it 1,650 pubs, predominantly in the South. S&N was building its geographical spread while others were shedding parts of theirs.
S&N and Courage dovetail nicely. Courage brews John Smith’s in Yorkshire, but has a predominant southern presence. S&N’s traditional territory has been the North and Scotland. Courage brews in London’s Mortlake, Reading and Bristol, as well as Tadcaster and Halifax.
It is a beerage made in heaven, but for a couple of glitches. A combined S&N and Courage could have as much as 30 per cent of the UK brewing market. That is almost certain to attract the attentions of the MMC. In a market of such retail sensitivity it will invoke the 25 per cent market share threshold.
Meanwhile, the Office of Fair Trading is conducting an inquiry into wholesale beer prices – an investigation triggered by allegations that Courage offers discounts to pubs in the all-important free trade but not those in its tied estate – echoes of Lord Young.
The first of these problems is nice to have. The sale of brands and, or assets will bring S&N/Courage’s combined market share down closer to Bass’ 23 per cent. It is possible to achieve this without damage to the critical geographical synthesis the merger will create.
The OFT investigation is thornier. However, S&N’s distribution disciplines could dispel the kind of practice, born of growing desperation in a market suffering from overcapacity, that has burdened the proposed expansion of the likes of Foster’s in the UK.
That such disciplines exist should not be in much doubt. S&N has come from fifth among British brewers since the time of the Elders bid, with an 11 per cent market share and a market capitalisation of £1.4bn. It has more than doubled pre-tax profits to £270m. And is capitalised at £2.7bn.
Coming from behind has played its strategic part. While top-heavy brewers have struggled with the challenges and vagaries of a changing environment created by regulators, S&N has been fleet enough of foot to take advantage.
But S&N’s growth must also be down to Brian Stewart, who replaced Rankin as chief executive. Management like that does not grow on hops.
But there is one further and – for industry as a whole – more important point. Seven years ago, S&N could have been snapped up by an Australian brewer that has since failed to deliver on its British promise. And, seven years ago, a febrile British economy was still gripped by an obsession with the high-leverage, cross-border, hostile takeover as a way of driving corporate values.
If nothing else, the S&N story shows that good companies should not necessarily be available to the highest bidders, subject only to competition issues. Taking a longer term view of the industry has literally paid dividends for S&N. If its expansion after the takeover threat is a symptom of our departure from the short-term motives of the Eighties then we should welcome it.
One begins to wonder how Rowntree would have prospered without NestlÃ©
George Pitcher is joint managing director of media consultancy Luther Pendragon.