Bass is about to achieve its long-held dream of becoming the Anheuser-Busch of the UK – if its planned 380m takeover of Carlsberg-Tetley gets the thumbs up.
In the US, Anheuser-Busch controls nearly half of the beer market, with most of the other half controlled by Phillip Morris’s Miller Brewing.
City broker James Capel’s analysts say that cost-savings from mergers such as that of Scottish & Newcastle with Courage, and Bass with C-T, combined with a reduction in beer price competition among pubs, will increase profits and prove a potent cocktail for investors.
Capel reckons that the consolidation of the UK market into two giants, taking an 80 per cent share, will increase total beer profits by two thirds, from 450m last year to a whopping 750m after the Bass-C-T deal goes through.
Last year’s takeover of Courage by Scottish & Newcastle created the first of the UK’s beer behemoths, with the new Scottish Courage holding up to a 30 per cent share of the beer market. If the Bass takeover of C-T goes through unhindered by monopoly regulators, the new company will have over 40 per cent of the market.
But unlike Scottish & Newcastle’s brand-driven takeover of Courage, Bass is looking to be number one in the beer industry, rather than seeking ownership of more big brands. This is a corporate issue about reducing over-capacity in the beer market, closing a couple of breweries and gaining control of pricing.
As one industry insider says: “The reason that Bass is interested in a C-T takeover is not fundamentally brand-driven. It is more likely to make the decision on the grounds of long-term economies of production, and because of the benefits of gaining a bigger retail stake.
More pubs mean more volume and more money to invest behind the brands.”
S&N needed Courage’s brands as a way of expanding into England and the South. Under marketing director John Nicolson, Courage brands gained an equity unrivalled by its competitors. Foster’s on the lager side and John Smith’s in ales were both built up into powerful brands in England.
Bass lacks a powerful national ale brand, and getting its hands on
C-T would give it access to Tetley, which claims to be the UK’s number one bitter. C-T has forged an unfortunate reputation in brand development – it was last into the market with a widget-beer, and had a costly product recall when a Tetley widget came apart in a drinker’s throat. It also launched Castlemaine XXXX as an Australian rival to Foster’s, but never managed to build it as successfully.
Bass, on the other hand, has gone from a sluggish approach to brand development to a period of hyperactivity. Under marketing director Seamus McBride, it developed some 25 experimental brands in the early Nineties to see what would happen. Most of them failed, but a few have found favour, such as the alcoholic lemonade Hooper’s Hooch and the weird but wonderful Caffrey’s, which combines the qualities of an ale, a stout and a lager.
An industry insider says: “It is not so long ago that Bass had a very poor reputation for npd. It had so many pubs, its beer obviously sold through sheer force of numbers. After the Beer Orders it had to change its attitude. Its first tranche of npd did not work that well, but now it is very good at it.
“Bass was so big, it was slow to work on the idea of imported brands. Smaller players, like Whitbread, got better at that because they had to.”
The marketers at Bass are not afraid of taking chances either. Take the Bass home delivery experiment at the end of last year. Bass offered doorstep deliveries of its top brands in a move that raised the hackles of its wholesale customers (MW November 10 1995). Such was their outrage that Bass was forced to cut short the experiment in a humiliating U-turn. Critics say Bass should have seen that the move would upset its trade customers, but they praised the company for its bravery in undertaking such a risky experiment.
Shareholders may be among the few who will benefit from this new duopoly money. A long-standing critic of the beer industry, The Campaign for Real Ale, sees a Bass takeover of C-T as a threat to consumers, pub owners and beer lovers alike. CAMRA’s Stephen Cox says: “This lemming-like leap into takeovers by the big brewers will be disastrous for the beer industry. It will end up with power held by two players, like the cola, cider and soap powder markets. The emphasis will be on style rather than content. Beer brands will disappear and there will be fewer but stronger brands.”
This monolithic new order will change the nation’s drinking habits for good, as a question mark is put over the many small and regional brands loved in pubs and clubs across the country.
C-T standard lager Skol, which has already had its ad budget cut, could be dropped altogether because it competes head on with Bass’s standard lager Carling Black Label. Another lager that would face an uncertain future is Castlemaine, which would clash with Carlsberg.
Ansells, a C-T regional brand, could face the chopping board as it competes in the Midlands with Bass’s MB. And how would the combined company market both Bass’s Hooper’s Hooch alcoholic lemonade and C-T’s Lemonhead?
The road to a Bass takeover is paved with difficulties. There are four separate players to account for and none can possibly comment on a situation in which its own interests are at stake.
In any case, Bass has been linked to other acquisitions over the past few months, which analysts are still not ruling out. Apart from its brewing interests, Bass is one of the leading players in the UK leisure market. It owns an extensive retail estate, with about 2,500 pubs and bars, and the recently acquired Harvester restaurants.
It is rapidly expanding its branded pubs, and the O’Neills Irish Bars are the fastest growing themed pub chain. It has the Coral betting shop chain, and Gala bingo halls and also extensive hotel interests, including the Holiday Inn chain and Crown Plaza. The leisure industry is in the middle of an upturn, and the City is looking for greater consolidation of its interests.
City speculation has linked Bass to the Ladbroke group, which owns both the Ladbroke betting shops and Hilton Hotels outside the US. Another rumour suggested Bass was eyeing up Brent Walker’s William Hill betting chain.
Presumably, management time will not permit Bass to indulge in all the suggested takeovers. But the C-T takeover is the one most widely expected to take place in the near future.
Allied Domecq, which owns the Tetley half of the joint-venture, is the most likely to want a deal to go ahead. The company has been divesting itself of its non-core interests, with the aim of concentrating on spirits and retailing. The company just wants to get the right price for its share of C-T.
The two wild cards in the pack are Carlsberg and – what could turn out to be the joker – the monopoly regulator.
James Capel’s note on the takeover, published last July but gaining increasing credibility as the months pass, says Carlsberg is most likely to take a minority stake in the combined company (MW August 18 1995).
Capel looked at a precedent for Carlsberg taking a minority stake. In 1991, it did just that when it sold its 60 per cent in the Spanish union Cervecera to Guinness-owned Cruzcampo, and then acquired a ten per cent share of the combine. Capel says: “This scenario has the advantage that pushing C-T together with another existing UK brewer would yield economies of scale and opportunities for rationalisation, hence improving competitiveness and profits, plus Carlsberg participates in increased profitability from consolidation in the UK brewing industry.”
As for the regulator, the Office of Fair Trading is presumably aware of the issues surrounding a takeover. After the Government’s ushering through of the S&N/Courage deal virtually condition-free, it is assumed a Bass/C-T deal will receive similar treatment. Some suspect a stipulation could be that C-T brands keep their supply deal with Allied Domecq pubs and Bass brands keep going through Bass outlets.
While the takeover could be a dream come true for Bass chairman Sir Ian Prosser, it will be a nightmare for marketing director Seamus McBride. Sir Ian hopes to win the admiration of Bass shareholders; McBride will be left holding the brands. He will have to take some tough decisions on how to line up the portfolio of ales and lagers – and where to put his combined ad budget.