When Carlsberg and Heineken announced in October that they were seeking to negotiate a friendly takeover and breakup of rival Scottish & Newcastle, they no doubt hoped to profit from a management transition then under way at the U.K.’s largest brewer. What they got instead was a spirited defense from the company’s CEO-designate, John Dunsmore, that produced a bigger takeover premium for Scottish & Newcastle shareholders.
Dunsmore, a former beverages analyst and head of equities at the now-defunct NatWest Securities, made his reputation as head of Scottish & Newcastle’s U.K. business from 2002 to 2007 by boosting sales of such brands as Foster’s and John Smith’s and tripling profits. He was named as successor to retiring CEO Tony Froggatt in September and was scheduled to take the top job in November. But in October, when Carlsberg and Heineken first mooted their willingness to jointly pay 720 pence ($14.30) a share, or £7 billion ($13.9 billion), for an agreed takeover, Dunsmore effectively took control. “We had to make tough decisions and move pretty fast, so it was best to have complete clarity about who was in charge,” the 49-year-old executive tells Institutional Investor.
Dunsmore played hardball and rejected the approach as “derisory.” He stuck to his guns in November and early January when the predators upped their price, first to 750 pence and then to 780. Dunsmore had his advisers — Deutsche Bank, Rothschild and UBS — draw up a detailed breakup analysis and publicly declared that the business was worth 800 pence a share.
Crucially, he succeeded in focusing the takeover battle on the growth prospects of Baltic Beverages Holding, a 50-50 joint venture between Scottish & Newcastle and Carlsberg that is Russia’s leading brewer. The partners had a detailed but confidential internal projection forecasting that Baltic’s operating profit would increase 58 percent, to €990 million ($1.5 billion), by 2010. With most securities analysts having lower estimates on Baltic’s outlook, Carlsberg refused to release the internal document, a step that required the approval of both parties. Dunsmore accused Carlsberg of trying to win control of Baltic on the cheap and filed a claim for breach of the joint venture agreement with an arbitration court in Sweden, where Baltic is incorporated. A spokesman at Carlsberg declined to comment on why the company refused to release the forecast.
“Carlsberg took the decision to time-arbitrage the report’s confidentiality, raising acquisition funding based on Baltic’s prospects before the market was able to price in the upside from BBH,” says Dunsmore. “We endured some abuse, but we held our ground and eventually won.” He agreed to enter into talks in mid-January after the consortium agreed to meet his price and to release the Baltic forecast if Scottish & Newcastle’s board would support the bid; the two sides eventually agreed to the £7.8 billion takeover in late January. Shareholders approved the deal last month.
The agreed-upon offer was 25.8 percent higher than Scottish & Newcastle’s closing price on October 16, the day before Carlsberg and Heineken revealed their intentions, and 50.7 percent above the share price on March 28, the day before speculation about a possible bid first arose in the market.
Carlsberg paid all of the final 20 pence-a-share increase and ended up footing 55.9 percent of the takeover bill. The Danish brewer will acquire Scottish & Newcastle’s businesses in China, France, Greece and Vietnam as well as gain full control of Baltic. Lehman Brothers advised Carlsberg and provided bridge financing ahead of a planned 31.5 billion-kroner ($6.7 billion) rights issue. Heineken will get Scottish & Newcastle’s operations in Belgium, Finland, India, Ireland, the U.K. and the U.S. Credit Suisse advised the Dutch company and led a syndicate that is lending the company £3.4 billion.
Dunsmore, who will earn a windfall of £5.1 million from the deal, is staying on until June to oversee the breakup. At that point he will have been CEO of the 259-year-old brewer for just seven months. “There might have been a better way to create value down the road,” he muses. But as CEO, he adds, “you’ve got to discount risk and time and accept a reasonable offer.”
