Scottish & Newcastle (S&N) will today unveil key third-quarter sales figures for BBH, its joint venture with estranged partner Carlsberg, amid growing market sentiment that its independent days are numbered.
Scottish & Newcastle (S&N) will today unveil key third-quarter sales figures for BBH, its joint venture with estranged partner Carlsberg, amid growing market sentiment that its independent days are numbered.
BBH is likely to report sales growth of at least 5%, on top of double-digit growth a year ago, but the focus will be on "BBH's ability to grow share in an increasingly competitive market" and margin pressures, according to Redman Partners.
Carlsberg itself is also reporting third-quarter sales today, which along with figures tomorrow from Inbev could also highlight continuing pressures in the UK market.
Chris Pitcher, drinks research partner at Redman, says he believes S&N's pursuit of arbitration on its BBH shareholder agreement with Carlsberg is "being used by S&N to extract a full and explicit value from Carlsberg for BBH as part of the consortium offer".
He says the much-vaunted shotgun agreement which would, in theory, give S&N the right to buy Carlsberg's 50% stake is unlikely to be activated. S&N shareholders would not back a rights issue to raise the £4bn implied by current valuations, while a partner would not commit £4bn to only shared control. Nor could S&N sell its BBH stake and remain independent.
"BBH is central to S&N being able to achieve a higher valuation than the original 720p proposed offer which it rejected," Pitcher says. "Only Carlsberg and S&N would be party to what they believe the true blue-sky potential of BBH profitability to be and it is unlikely that S&N is going to let this potential go on the cheap."
However, he says even assuming a 33% margin for BBH in 10 years' time (the same as its peak 1997 level, and well ahead of the currently forecast 23%) and a medium-term sales growth of 10%, "this would add some £760m of value and take a bid to the region of 800p ... as such we would regard this valuation as starting to look stretched".
However, Pitcher says that if the Stockholm arbitration is allowed to run, and finds in S&N's favour, "an 800p bid is more likely to be extracted".
He concludes: "We believe that there is a risk that the whole process lasts longer than is currently discounted in the price, as the consortium waits for a further deterioration in fundamentals and stock market conditions, while S&N waits to strengthen its hand through arbitration on the BBH shareholder's agreement."
The Takeover Panel, meanwhile, could ask Carlsberg to commit to a firm offer, but would need prompting from S&N.
"If S&N is committed to the legal route to enforce the BBH agreement, and the consortium are patient, this could play out longer than expected."
