Russia: Baltika beer in the war for dominance

Baltika, part-owned by Scottish & Newcastle, is grappling with rival local beers produced by Sun Interbrew and Heineken Russia, Sunday Herald commented on January 22. Analysts are predicting a triumphant success for Baltika in Russia. Lehman Brothers analyst Ian Shackleton is convinced it is going to emerge as Russia’s king of beers.

Since the mid-1990s, volume sales of beer have been growing at up to 20% a year as it rapidly replaced vodka as the favoured drink among Russia’s young, trendy and professional classes.

Sales growth is now stalling as the market matures, but the new entrants have benefited from a very lax regime. Until 2004 there were virtually no restrictions on the sale of beer to the public. The vast majority is still bought from kiosks and swigged in the street.

Edinburgh-based Scottish & Newcastle first took a slice of the action when it acquired Finnish rival Hartwall for £1.2 billion in 2002. With the deal came a 50% stake in Baltic Beverage Holding (BBH), among whose most prized assets was Baltika Brewery in St Petersburg.

BBH had pushed all the right buttons, acquiring local breweries and rolling out its brands across the chaos of post Soviet Russia after being privatised under Boris Yeltsin’s presidency in 1992. Today a 50/50 joint venture between S&N and Denmark-based Carlsberg Breweries, BBH is Russia’s largest brewer with an estimated market share of 37.7%.

But last summer BBH’s attempts to consolidate the ownership of its brewing interests in Russia met with fierce resistance from local minority shareholders. Not only did they vote down BBH’s proposal to take control of the Siberian brewer Pikra, they also launched a string of lawsuits, most of which have since been kicked out by the Russian courts.

On Wednesday, BBH had a second stab at consolidating its Russian interests, this time adopting a much more conciliatory tone towards the independent shareholders. Under a new cash or share deal, BBH seems confident that, by December this year or early in 2007, it will have managed to fully merge Baltika Brewery with its other three Russian subsidiaries – Vena, Yarpivo and Pikra. BBH is currently the majority shareholder of all four companies, which together operate 10 breweries across Russia.

This time the merging companies have had their market value assessed independently by accountants Deloitte. S&N spokesman Rob Ballantyne believes most of the minority shareholders will opt to take a smaller stake in the enlarged BBH group. BBH believes simplifying its ownership structure will generate cost savings of $60 million to $80m in the first full year and create operational efficiencies in the enlarged group.

To allay local suspicions that this was a further example of rapacious Western capitalists seeking to tighten their grip on Russian assets, Baltika said it would invest a considerable share of funds raised from the consolidation on brand development in the country.

Baltika’s president Anton Artemiev said the group would boost production capacity from 29 million hectolitres in 2004 to 50 million hectolitres and that net revenues would rise from $994m to $1.51bn with profits rising from $253m to a proforma $395m. He said: “The combination of these four companies will strengthen Baltika as the leading brewer and the largest fast-moving consumer goods company in Russia, as well as a proud symbol of Russian business success across the globe.”

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