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Heineken UK

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Heineken UK is the country's leading brewer as a result of its takeover of the local operations of Scottish & Newcastle in 2008. In addition to the Heineken brand, its beers include Foster's, John Smith's, Strongbow and local rights to Kronenbourg. Despite its size, S&N had for many years featured high on the list of potential takeover targets in the rapidly consolidating beer industry. In the 2008 takeover, the group's assets were split between Heineken and bid partner Carlsberg. Heineken assumed control of S&N's core UK operations as well as interests in Portugal, Finland and India. Carlsberg took full control of Baltic Beverages, Russia's leading brewer, as well as S&N's French subsidiary Kronenbourg and its operations in Greece and China. The company continued to trade under the Scottish & Newcastle name until November 2009, when it became Heineken UK.

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Competitors

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Brands & Activities

Until its break-up, Scottish & Newcastle was the dominant brewer in the UK and France, and had a strong position in several other markets although the best of these - Russia and the Baltics - were shared with Carlsberg via a joint venture. Another weakness, especially in the UK, was S&N's over-reliance on licensed brand Foster's. It acquired full local rights to the beer in 2006, but otherwise, its only wholly owned international brand was Kronenbourg. In the rapidly consolidating global market S&N remained a comparative minnow alongside such giants as InBev, Anheuser and SABMiller. As a result it had been widely tipped for some time as a potential takeover target.

In October 2007, Carlsberg and Heineken announced that they were teaming up to launch a break-up bid for Scottish & Newcastle. The latter's official response was that any such approach, especially from trading partner Carlsberg was "unwelcome", and it rejected an initial conditional offer of £6.8bn as "derisory". A second offer was also rejected, but S&N agreed to open its books to the bidders in January 2008 after a third offer was received worth around £7.8bn. The British company eventually agreed to recommend Carlsberg and Heineken's offer to its shareholders. There was talk of other bids being prepared by rival buyers, first SABMiller and then Anheuser-Busch, but neither offer materialised. Carlsberg took full control of Baltic Beverages as well as S&N's French subsidiary Kronenbourg and its operations in Greece and China. Heineken assumed control of S&N's core UK operations, as well as interests in Portugal, Finland and India.

As a result, Heineken inherited Scottish & Newcastle's position as the UK's #1 brewer, with around 24% share of the local beer market in 2013 and 42% of cider. (Molson Coors, InBev and Carlsberg have around 19%, 17% and 14% share respectively). The UK is also now the Heineken Group's most important market in Western Europe. Foster's is the #2 mainstream beer brand in the UK (behind Coors' Carling) with on-trade sales worth more than £1.5bn a year. It is also the #2 in the off-trade (ie take-home) market behind Stella Artois, with sales of £420m in the year to Mar 2017 (IRI, The Grocer). Originally brewed under license from Foster's Group of Australia, S&N acquired full ownership of the brand in Europe and Russia in 2006. Several variants are marketed in the UK including Foster's Radler and rum-flavoured Foster's Rocks. In 2016, the brand became the official beer of England Cricket. Global ownership of Kronenbourg passed to Carlsberg following the break-up of Scottish & Newcastle, but Heineken UK retained local rights. Kronenbourg 1664 is the UK's #2 premium lager, and is the umbrella for a small family of variants (off-trade sales were £142m in ye Mar 2017).

Strongbow, acquired by S&N in 2003, is the best-selling mainstream cider by far with around 35% share, and combined off-trade sales of £296m. The main Original version is the most popular but is accompanied by a small stable of flavour variants including Dark Fruit, Pear, 2014 launch Citrus Edge, and 2015's Cloudy Apple. Foster's, Kronenbourg and Strongbow feature among the UK's top ten take-home brews. They are supported by Bulmers, the top-selling premium packaged cider (£57m off-trade); best-selling ale John Smith's, with on-trade sales worth more than £650m annually, and another £68m off-trade, as well as Heineken's other brands in the UK, including Heineken itself (off-trade around £65m), Scrumpy Jack cider (£20m) and Amstel (£25m). The newest focus brand in the portfolio is Desperados, a tequila-flavoured beer originally developed in France. Sales in 2016 were £44m. In 2010, the group took over local control of the Sol brand, previously handled by Molson Coors UK.

The group's sizeable portfolio of what it calls "speciality" brands includes Woodpecker and Jacques ciders; Deuchars IPA and Newcastle Brown Ale (which also has a substantial export market in the US and Scandinavia). Imported "world beers" include Tiger, Sagres, Moretti and Zywiec. The group has also reclaimed UK rights to Murphy's stout, already owned in Ireland by Heineken but previously licensed in the UK to InBev. Heineken operates three breweries in the UK, in Edinburgh, Manchester and North Yorkshire, and two cider mills. Scottish beers McEwan's and Younger's were sold in 2011 to Wells & Young's.

Until 2010, a separate subsidiary, Waverley TBS, was the largest wine and spirits wholesale to the "on-trade" (ie. pubs, bars, hotels and restaurants as well as major multiple retailers). It also has UK distribution rights to such leading wine labels as Wolf Blass, Montana, Gallo and Campo Viejo. That business was sold to investment firm Mansfield Partners for an undisclosed fee.

A third division of S&N had historically owned a large portfolio of pubs and inns, including the Chef & Brewer and Rat & Parrot brands, low-priced hotel chain Premier Lodge and a large number of unbranded pubs and bars. S&N sold ownership of most of this business in a series of chunks during 2003, many of them to Royal Bank of Scotland, but it continued to manage around 1,300 of these pubs around the country under contract, in partnership with their resident publicans. This estate includes 425 pubs added in November 2009 following the collapse of the Globe Pub Company, previously controlled by financier Robert Tchenguiz. At the end of 2011, Heineken paid £412m to reacquire 920 pubs from RBS, and these now operate under the banner of Star Pubs & Bars. The estate currently covers 1,100 outlets. In 2016, the group bid to acquire around 1,900 additional pubs from Punch Taverns. That deal was finally approved by regulators in August 2017.

Financials

Heineken UK reported revenues of £1.22bn in 2014, up 1% on the year before. Net profit was £126m, compared to a £67m loss the year before as a result of a restructuring of the company's supply chain.

Background

Scottish & Newcastle was the amalgamation of several different regional beer-makers, which gradually consolidated from the 18th century. The two key mergers in S&N's history were the creation of a combined business from Scottish Brewers and Newcastle Breweries in 1960, followed by the acquisition of Courage Breweries in 1995. It was the latter move which propelled S&N into market leadership in the UK over rival Bass.

In fact, the group's roots date as far back as 1749, when William Younger established a brewery in new premises in Leith in Scotland. By the mid-19th century, Younger's brewery faced competition from a rival business, William McEwan's Fountain Brewery. Although Younger's business was doing well, McEwan was fiercely entrepreneurial and grew even more rapidly, going public in 1889, with a market capitalisation of £1m, then a very significant sum. By the end of the century McEwan had nearly 90% of the beer trade in the north east of England, a flourishing trade in Scotland, and a valuable export trade to Australia, South Africa, New Zealand and India.

After years of sparring with each other, Younger's and McEwan's joined forces in 1931 as Scottish Brewers, while subsidiary Younger McEwan was formed to manage international trade. Though based in Scotland, Scottish Brewers' market strength in northern England brought it into direct competition with rival firm Newcastle Breweries. Like Scottish, this was an amalgamation of several regional breweries acquired by core business John Barras, which had been making ale in Gateshead since 1770. As had been the case with Younger's and McEwan's, merger became a more sensible prospect than competition and Scottish and Newcastle became one company in 1960.

S&N began to diversify beyond beer-making later in that decade. There were already a number of hotels within the business, mainly offshoots of large pubs owned by one or other brewery, and these were grouped together in 1965 to form Thistle Hotels. In the late 1970s, S&N flirted with drinks retail, acquiring Gough Brothers off-licenses in 1979, before selling it on to Seagram five years later. The group expanded its drinks portfolio during the 1980s, acquiring Moray Firth Maltings in 1985 (sold 1999), The Home Brewery in 1986, and Theakston's in 1987. The latter two purchases brought with them a large portfolio of more than 1,000 "tied" pubs selling each brewery's own beers.

The following year, S&N was targeted by Australian group Elders IXL in a hostile takeover. A wide-ranging, fast-growing conglomerate based around the Foster's brewery it had acquired in 1982, Elders had entered the UK in 1986 with the purchase of London-based Courage Brewery for £1.4bn, then the largest ever overseas takeover by an Australian company. At the same time, intent on creating a global "superbrewer", Elders swallowed up Canada's Molson. But the ambitious Australian group's attempted takeover of S&N proved more problematic. After a hard-fought battle, Elders won over S&N's shareholders, but the purchase was subsequently blocked by UK regulators in 1989 on competitive grounds. Meanwhile, as the boom years of the 1980s turned into the economic hangover of the 1990s, the Australian predator found itself increasingly restricted by the huge debt burden it had accumulated to fund its international expansion. In 1993, the group was forced to start selling off assets. Two years later S&N was able to acquire Courage for £425m, a neat reversal of the hostile bid of seven years earlier, and one which doubled the size of the group's brewery business.

Despite the defensive battle against Elders, S&N had continued to develop its non-brewing assets. In 1989 the Thistle group was sold to Mount Charlotte Hotels and the proceeds funded purchase of a 75% stake in Center Parcs, an unusual Dutch-based holiday resort chain in the UK and Northern Europe. The following year S&N bought Pontin's, another holiday resort chain which like its bigger rival Butlin's had converted disused army bases into seaside holiday camps. In 1993, S&N bought a further 1,650 pubs and retail outlets from Grand Metropolitan (now Diageo) to become the leading pub retailer in the South of England. A further deal to buy almost 800 pubs in 1999 from Greenalls gave S&N a grand total of 3,400 drinking houses, more than was allowed under government restrictions. S&N countered this by selling part of the portfolio to the property arm of Royal Bank of Scotland, in return for a management contract to run the outlets on RBS's behalf.

As a new millennium dawned, the UK brewing industry began to undergo a number of huge changes. In 2000 both Whitbread and Bass took steps to move out of the beer business altogether in favour of leisure. S&N moved quickly in the opposite direction to take up the slack. In March that year it became Europe's second biggest brewer with the purchase of Brasseries Kronenbourg and Alken Maes from Danone. This was followed a few months later by a deal to buy a half share of Portuguese brewer Central De Cervejas. At the end of the year, S&N quit the leisure market, selling both Center Parcs and Pontin's. In 2001 the group began pruning its pub estate, selling off more than 1,000 outlets to other operators and private equity companies. Early the following year, S&N bolstered its international presence with a €2bn takeover of Finnish brewer Hartwall. S&N also agreed a joint venture with United Breweries, the leading Indian brewer, to acquire and develop brewing companies in Asia, and announced plans to move into Greece, with an initial stake in Mythos Breweries. In Spring 2003 the group agreed to acquire struggling cidermaker HP Bulmer, and sold off the final chunk of its retail portfolio of pubs and bars in October to Sprit Group for £2.5bn. In 2005, S&N relinquished the UK license for Beck's, which it had controlled since 1987, to its global owner InBev; and control of Miller to SABMiller (although it continued to brew Miller locally for several years under license).

Tony Froggatt stepped down as group chief executive in 2007 and was replaced by John Dunsmore, formerly chairman & managing director of S&N Western Europe. In its last full year as an independent company, consolidated revenues from Scottish & Newcastle's continuing operations in 2007 rose 8% to £4.2bn. Reported sales were flat on the previous year, which also included contributions from a substantial wholesale distribution business in France which has been sold. Pretax profits were also flat at £444m.

Last full revision 29th March 2016

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