Dutch in search for Scottish courage

Heineken's takeover of S&N heralds a new era, but it faces a battle for sales in a crowded market, writes William Lyons

AS THE applause echoed around Edinburgh's Royal College of Physicians on Wednesday night, Sir Brian Stewart wrapped up what turned out to be a valedictory speech marking the end of an era. The evening – a farewell dinner for former directors, senior colleagues and friends – belonged to him.

"Scottish & Newcastle has been and is Sir Brian Stewart," declared chief executive John Dunsmore in his own address, "and that makes this evening all the more remarkable."

For Stewart, who has been with S&N for more than 30 years, there was still one last bit of business to attend to. The following morning, in his final board meeting, he accepted the resignations of his executive colleagues ahead of the suspension of shares that night.

"There was a strange mix of sadness and a feeling of having delivered," said one insider. "Persuading the consortium to pay 800p, from a starting point of 530p, was a real achievement. But now we can all move forward."

Tomorrow morning the shares will officially de-list. The £7.8bn takeover by Carlsberg and Heineken is expected to be wrapped up by late tomorrow night. For S&N, a new era under the ownership of Dutch drinks giant Heineken will begin.

Dunsmore and his fellow directors Stephen Glancey, Ian McHoul and John Nicolson have agreed to stay on for three months to oversee the handover. But despite assurances from Heineken that they will retain the UK operation, many are now asking what happens next.

Britain's last big independent brewer, with annual sales of £3.3bn, has seen many changes in its 250-year history. But even to a management team that is used to disposals, acquisitions and executive changes, a foreign owner will feel unfamiliar.

For Jean-François van Boxmeer, chief executive of Heineken, the deal is transformational. Heineken commands just 1.1% of the UK market, but by Tuesday morning it becomes the market leader with a share of nearly 30%, ahead of Carling/Coors, InBev and Carlsberg.

The Heineken board was meeting in Amsterdam this weekend with a view to making an announcement as early as this week. Speaking from Holland, a spokesman said: "We are enormously excited about bringing Scottish & Newcastle under the Heineken umbrella. It is a really exciting move for us. We did the acquisition because we thought there was huge growth potential going forward."

Until the deal has formally gone through, Heineken refuses to comment on future plans, but most industry analysts expect S&N's UK managing director Jeremy Blood to be named as the firm's new head. "There is a feeling that if it ain't broke, don't fix it," said one analyst. "Jeremy has run the UK side of the business and has done a very good job. We expect that to continue."

Blood, who joined S&N in 1988 as a graduate trainee, has worked his way up through the company, holding a variety of marketing and strategy positions in both the beer and pub retail divisions.

"He's pretty switched on," says Mark Brumby, drinks analyst with Blue Oar Securities. "There are a lot of high-calibre individuals in that company, but Jeremy is certainly up there."

Dunsmore, a former City analyst, and the rest of the board will go. Dunsmore's ability to extract a further £2bn from the Danish consortium has not gone unnoticed, especially in the City where he has plenty of admirers. He is already linked with a position at Mitchells & Butlers, the pubs operator, and many analysts are tipping him for a big job.

"He's clearly something a bit special," said one analyst. "When the S&N board were wavering, it was Dunsmore who said hold out for 800p. I can see him heading up a big company, but probably not M&B." Van Boxmeer has already given assurances that British operations will continue to be based in Edinburgh. Negotiations haven't begun, although up to 150 redundancies are expected, mainly at group head office level.

Heineken itself is set for a major push in the UK through S&N's distribution channels. Analysts say that the advertising and marketing on the brand has already begun with a view to beefing up its presence in the pubs and bar sector.

"Heineken has always had a reputation as the brand marketeer in the beer industry and they will certainly want to grow Heineken in the UK," said one analyst. "The Heineken brand is already being heavily advertised and they are clearly going to build that at the expense of Kronenbourg, which, being owned by Carlsberg, will command a royalty payment from Heineken. "On the cider front, one assumes there will be no change of strategy. Heineken has made a lot of noise around the deal that cider is something they want to make a lot of both in the UK and in Europe. S&N set a target earlier this year of achieving 50% of the over-ice cider market, from just over 30% now, so we expect it to be business as usual."

Question marks remain over S&N's Beamish business in Cork, as the Dutch brewer already owns Murphy's Stout, and there is also the question of Kronenbourg.

"By Tuesday Heineken will own the whole of Foster's Europe," said one analyst. "So they will want to keep that. Van Boxmeer is known to like John Smith's, while small brands such as Newcastle Brown Ale may be the focus of a push. Remember, Heineken has a good track record of growing speciality beers."

The history of Heineken offers a fascinating insight into one of Europe's richest dynasties. It began in 1863 when Gerard Heineken's mother bankrolled her son's acquisition of the 271-year-old De Hooiberg brewery after being outraged by the numbers of drunken Dutch folk befuddled with gin. Over the next 140 years, Gerard and his descendents grew the business with a handful of brands including Amstel, Murphy's Stout and Tiger Beer.

Under the stewardship of Freddie Heineken, who bought back the family firm on the stock exchange in 1954, the business grew into a household name around much of the world.

Developments such as the world-famous green bottle, memorable advertising slogans such as "Refreshes the parts other beers cannot reach" and a series of acquisitions turned the company into one of the world's largest beer firms and the biggest beer exporter anywhere on the planet.

Heineken today has 119 breweries around the world and sells its products in 170 countries. Last year it brewed 139.2 million hectolitres of beer, making it Europe's largest producer and distributor of beverages.

It entered the UK market through Whitbread, which at the time had a track record of growing lager brands such as Stella. Whitbread positioned Heineken as a mainstream low-alcohol lager.

Analysts argue that the strategy didn't work and that the board decided to pull the brand and re-introduce it as a premium product with a higher alcohol percentage. As one industry insider said: "It was a bit like saying you have been drinking watered-down piss for years but now here is the real stuff."

Following its re-introduction it has established itself through the off-trade (supermarkets and off-licences), having a limited presence in bars and pubs.

It is a situation Heineken will be looking to change.

Ironically, by growing its position in the UK, Heineken will be looking to knock out Carlsberg, which sits near the bottom of the UK in terms of market share.

S&N's strategy was always to obliterate the fourth player in the UK, which by Tuesday morning will be Carlsberg.

The future of the UK could be Heineken versus Carlsberg.

The Heineken story: 145 years of brewing

Heineken was founded in 1863 by Gerard Adriaan Heineken, who designed a revolutionary brewing process using a form of yeast developed at Pilsen by a student of Louis Pasteur. The same yeast strain is used by Heineken today. Within 11 years the flavoursome lager had garnered an international prize in Paris.

By the end of the 19th century, Heineken was being exported to France and the Dutch East Indies, and when Prohibition came to an end in 1933, Heineken became the first foreign beer allowed into America.

Henry Pierre Heineken, who had a weakness for alcohol, ran the company from 1914 until 1940, but then sold the family's stake in 1942. But it was his son, Alfred 'Freddy' Heineken, right, who transformed the company into a global force. A keen student of America's post-war advertising industry, he helped develop the world famous green bottle and the memorable advertising slogans such as "refreshes the parts other beers cannot reach". A series of acquisitions turned the company into one of the worlds largest beer firms and the biggest beer exporter anywhere on the planet.