LONDON (CNNfn) - Britain's largest brewer, Scottish & Newcastle, agreed Monday to merge its brewing operations with the Kronenbourg unit of France's Danone in a deal that could value their partnership at up to 1.7 billion pounds ($2.7 billion).|
Scottish & Newcastle (SCTN) will pay 470 million pounds for management control. Under terms of the deal, Danone (PBN) can sell its remaining interest in the partnership for 1.2 billion pounds at any time in the next three years.
Industry analysts had expected an announcement about the beer business, with Danone widely reported to be scouting various options to get rid of its Kronenbourg unit.
S&N brews Foster's lager, Britain's second-best selling beer, under license. Kronenbourg is France's most popular alcoholic beverage. The Kronenbourg unit also includes Alken Maes in Belgium and Birra Peroni in Italy, each of which ranks second in its home market.
The deal excludes Danone's indirectly owned minority holding in Spanish brewer San Miguel. The French company is reorganizing its holdings to turn that into a direct 33 percent stake, and said San Miguel might join the S&N alliance at a later date.
"This is a deal S&N had to do [to be a major European player]", according to analyst Hilary Cook at Barclays Stockbrokers. Cook pointed out that S&N's 28 percent market share in Britain bars it from growing by acquisition in the domestic market, so it had to look overseas.
Beer shake-up to continue
The shake-up in the European brewing industry is set to continue: Bass (BASS), Britain's No. 2 brewer, has said it is exploring its options regarding the sale of its beer activities, and European market leader Heineken has expressed interest in acquiring the business.
Britain's third-ranked brewer, Whitbread (WTB), attempted to dispose of its beer unit last year. The companies are shuffling their brewing assets in response to waning stock market interest in the industry: Both Whitbread and S&N dropped out of the FTSE 100 index Monday , replaced by so-called "new economy" stocks, because of declines in their respective market capitalizations. Both Whitbread and Bass want to focus on other leisure assets, such as restaurants, hotels and health clubs. S&N however, is slimming its portfolio in favor of brewing, and seeking to shed its holiday park division.
EC probing brewers
The European beer industry is under investigation by the competition authorities in Brussels because of alleged price fixing in some markets. The European Commission, the Brussels-based executive arm of the European Union, has raided several Danone facilities in the past year. The U.K. beer market also is under regulatory investigation, with the Office of Fair Trading mounting an enquiry into pricing and distribution. The OFT investigation centers on the link between the big brewers and the thousands of pubs they own.
S&N stock slid 3 percent to 390 pence in London Monday, while Danone stock dipped 1 percent in Paris to 215.70 euros. News of the deal revitalized other shares in the sector, with Whitbread gaining more than 5 percent, and London-Listed South African Breweries (SAB) up 1 percent.