Britain's biggest brewer Scottish and Newcastle (S&N) bolstered its defense against a Carlsberg and Heineken bid by moving to slash costs, but weak third-quarter trading sent its shares well below the bid price.
The brewer of Foster's, Kronenbourg and Newcastle Brown Ale deepened the rift with Carlsberg saying there will be no return to the 50-50 partnership at its Russia-based Baltic Beverages Holding (BBH) and it will fight to buy Carlsberg out of BBH.
S&N's new Chief Executive John Dunsmore said he plans to cut 20 million pounds of annual costs as he spelt out his position in rejecting the 7.3 billion-pound ($15 billion) cash offer from Denmark's Carlsberg and Dutch Heineken.
"The 750 pence bid values BBH at 3.2 billion pounds and we think the business is worth more," Dunsmore told a conference call on Tuesday. "We must make sure we get full value for BBH, one way or another," he added.
S&N shares dipped 1.2 percent to 730p, compared to the bid price of 750p after issuing a third-quarter trading and strategy update in a London stock market up around 0.9 percent. A recent Reuters poll showed that analysts believe Carlsberg/Heineken will have to pay 775-800p to win S&N.
Many analysts said the "defense document" was unimpressive with limited cost savings and the potential sale of a French distribution business offset by weak current trading.
Case For Independence
Analyst Rob Mann at brokers Collins Stewart described third-quarter trading as "very difficult" and looked to cut his earnings estimate for 2007 by 10 percent.
"Issuing a profit warning is a relatively unconventional way to begin a bid defence," he said.
Analyst Matthew Webb at Cazenove said the third-quarter trading update was "very weak" with a lack of market data for the UK and "awful" figures for France and Finland.
"Our provisional judgment is that S&N has not done enough to make a convincing case for independence. We continue to believe that S&N will ultimately succumb to a bid from the Carlsberg/Heineken consortium of between 780-800p," he said.
Last week, the world's fourth- and fifth-largest brewers, Heineken and Carlsberg, raised their proposed bid for the sixth-largest, S&N, to 750 pence per share from last month's 720p opening bid. The new price values the Edinburgh-based brewer at 7.3 billion pounds, or 9.7 billion including debt.
The 750p bid values S&N at 13.6 times 2006 core EBITDA earnings, compared to the 14.6 times SABMiller agreed to buy small Dutch brewer Grolsch on Monday.
Dunsmore said arbitration over Carlsberg breaking the BBH agreement will continue. The 50-50 arrangement with Carlsberg was not an option going forward and if arbitration was successful it will look to take over BBH with a possible minority partner and without need for a rights issue, he said.
S&N said it was taking on arbitration firm Hammaskiold & Co in addition to Linklaters in Sweden to advise in the battle.
Fast-growing BBH is seen as the jewel in S&N's crown as it controls over 85 percent of Baltika the biggest brewer in the world's third-largest beer market, Russia, and provides around one third of S&N and one third of Carlsberg's earnings.
S&N said in its trading update that its core western European market continued weak and France remained challenging, but it hoped to mitigate the rise in input costs by making savings and increasing its beer prices.
S&N will cut annual costs by 20 million pounds, starting in 2009, by outsourcing some UK brewing to Molson Coors which analysts say may include a brewery closure, and shutting a bottling plant at its Reading brewery in southern England.
The group added that it had agreed to sell a large proportion of its wholly owned French on-trade distribution business to bars for around 85 million pounds.