No Half Measures

So now we know. It will be Margaret Beckett, not Ian Lang, who will give the final thumbs up or down to one of the most decisive moves yet in the history of the UK beer market – the merger of Bass and Carlsberg-Tetley.

A Monopolies & Mergers Commission report was given to the Department of Trade & Industry last month but its process was halted by the election.

It is being seen in some quarters as the first test of Labour’s commitment to outlaw anti-competitive practices and abuses of market power.

But for at least one of the two companies involved, a decision cannot come soon enough, although the new President of the Board of Trade insists she will not be rushed into a decision which is close to the top of her priority list.

As MP for Derby South, only ten miles from the brewing town of Burton-on-Trent, Beckett knows how vital the industry is to the future of local communities. And if she ever forgets its importance, the Transport & General Workers Union, which provided more than 25 per cent of her election expenses in 1992, will be sure to remind her. Whatever the outcome, it is a safe bet that jobs will be lost, and that brands will disappear.

If the deal goes through, Bass gains more capacity, and regains the top slot as number one UK brewer, a position snatched from it by Scottish & Newcastle when it merged with Courage in 1995.

Bass will be able to implement economies of scale in production, distribution, sales and marketing. And it will get its hands on Carlsberg-Tetley’s on and off-trade customers, and crucially the supply agreement to 4,000 pubs owned by Allied Domecq (which owned half of C-T).

This supply agreement is due to expire in December 1997, but with a potentially more attractive Bass/ Carlsberg-Tetley brands portfolio, it is almost inconceivable that the agreement will not be renewed.

If, on the other hand, the merger is blocked – or if Bass walks away because of onerous conditions – it will leave an ailing C-T which will have to limp back to unwilling parents, Carlsberg and Allied. It has been speculated that the MMC could force Bass to sell some or all of its 1,400 pubs in its Bass Lease Company, or cut back on brewing capacity and give up brands. If the deal does fall through and the standalone C-T is broken up, jobs may still be lost and brands may still go into decline.

Regional brewers and real ale campaigners have lobbied against the planned merger since it was announced in August. They say with Scottish Courage already controlling about 31 per cent of the market, and the new Bass/C-T likely to own between 35 and 38 per cent, the end result will mean less consumer choice, as overlapping regional brands are axed. They also argue that there will be fewer routes to market for small brewers, which do not have the same clout to offer loans and discounts to the free trade.

A quick glance at the two brewers’ portfolios also shows how problematic it will be to integrate the biggest brands, much more so than was the case with Scottish & Newcastle and Cour-age, which were always seen as having complementary geographical strengths.

There are obvious clashes between Bass’s Caffrey’s Irish Ale and alcopop Hooper’s Hooch, and C-T’s Calders Cream Ale and Lemonhead. In the standard lager market, Bass’s Carling Black Label will come up against C-T’s Carlsberg and Castlemaine XXXX brands.

With pubs under pressure to stock new nitrokeg beers – such as the ale/lager hybrid Caffrey’s – and the relaunched ciders, few have the bar space for two standard lagers, let alone three.

Bass will have to come off the fence in the ales sector too. Will it be Worthington DB or Tetley Bitter that is crowned flagship national ale brand? Rather as Scottish Courage has favoured John Smith’s over Theakston’s.

Anti-merger campaigners predict regional brands such as C-T’s Ind Coope Burton Ale will take preference over Draught Bass, and fear up to 2,000 jobs will be lost.

But in the past few months, many former opponents of the deal have changed their views. Such is the concern that C-T could go into a terminal decline without the Bass takeover, they have switched sides, and see it as the lesser of two evils – for the industry and for the drinker.

One senior member of the Campaign for Real Ale says: “In terms of brand preservation, it might be a good thing if the merger goes through. We weren’t thinking like this three months ago.”

If C-T is left to stand alone, it will be by far the weakest of the national players and perhaps just as many jobs would be at risk. It might be forced to sell the prestigious Tetley brewery and brand to Bass, or Whitbread, and C-T could be left brewing mainly lager, or even filling up production capacity with low-price beers for the supermarkets. Bass has also had nine months to take a good look inside the business, and would be able to use this information to put the boot into the ailing brewer.

Merger or no merger, Bass will not lose out. Under the complex arrangements of the deal, Bass has an insurance policy whereby it can walk away even at this late stage. It will incur a 60m penalty, but analysts estimate that this will largely be offset by the fact that Bass has been drawing millions of pounds in profits from its half share in C-T since the deal was announced in August.

According to a Bass spokesman, the company is still committed to the deal, and any press comment that it is about to unravel is “pure speculation”. But there could also be an element of brinkmanship here.

One industry observer notes: “Bass is saying ‘C-T is in a mess without us. If the DTI upsets us we will walk away’. This could be a PR position to pressure the DTI.”

Beckett must accept the recommendations of the MMC report if it gives clearance to the merger, but if it advises blocking the deal or imposing undertakings she can either overrule or alter the conditions.

For New Labour, the merger will undoubtedly be one of its first, and most taxing decisions. The new Government is perceived as being less amenable than its predecessor to such concentrations of market power, but has yet to commit itself to giving public interest considerations greater weight in takeover policy. The Labour manifesto stated: “We will adopt a tough ‘prohibitive’ approach to deter anti-competitive practices and abuses of market power.”

The dilemma for Beckett and Labour is that while they want to be business-friendly they also need to show that they will not be rolled over. And with an in-tray at the DTI that includes an MMC report on the merger of P&O and Stena – plus outstanding decisions on the mergers of BA and American Airlines – Beckett will come under early pressure to impose Labour’s authority on competition policy.

Despite job losses, the reduction in opposition to the Bass/C-T deal could provide Labour with the opportunity to show its business-friendly face.

The Never Ending Merger

March 1996: Talks between Whitbread and Allied Domecq to buy Allied’s 50 per cent stake in Carlsberg-Tetley stall, leaving Bass clear to make its move.

August 25 1996: Bass announces that it has bought Allied’s share for 200m. Carlsberg, which owns the other 50 per cent of C-T, agrees to contribute its half-share plus 20m in return for a 20 per cent interest in the merged company. Bass will receive 50 per cent of all profits earned by C-T until the merger is complete. If Bass pulls out it has an agreement to sell on Allied’s interest to Carlsberg for 110m, and Allied will repay Bass 30m – leaving Bass 60m out of pocket. In that scenario Carlsberg would hold 85 per cent of C-T, with Allied agreeing to pick up the remainder.

December 9 1996: Ian Lang, President of the Board of Trade, refers the proposed merger to the Monopolies & Mergers Commission on the advice of the Office of Fair Trading.

March 24 1997: The MMC completes its report on the deal and delivers it to Ian Lang, who delays its publication until after the general election.

May 2 1997: Margaret Beckett becomes President of the Board of Trade, inheriting the MMC report into the Bass/C-T deal. Observers say a decision may not be announced until July.