S&N takeover set to dominate markets

Mar 31 2008

The £7.8 billion takeover of brewer Scottish & Newcastle will move a step closer this week, although the spotlight will also be on smaller firms with results from Woolworths and Irn-Bru maker AG Barr.

Shareholders of Foster’s and Kronenbourg 1664 maker Scottish & Newcastle will gather in Edinburgh tomorrow to call time on more than 250 years of history for the UK’s biggest brewer.

Investors are set to approve the £7.8 billion takeover by European giants Heineken and Carlsberg, which will herald a break-up of the business.

S&N’s board finally agreed to the duo’s fourth offer for the company in January following a three-month pursuit.

After Monday’s approval, the deal should be given court approval in late April before a likely completion on April 28.

The company’s UK operation will pass to Dutch giant Heineken. It has breweries in Manchester, Reading, Dunston near Newcastle, and Tadcaster, in North Yorkshire, as well as owning the Bulmers cider mill in Hereford.

In February, the company announced plans to close its Reading brewery by 2010 under cost-cutting plans, leaving S&N with around 3,000 UK staff.

Heineken will also gain S&N’s businesses in Portugal, Ireland, Finland and Belgium.

Danish brewer Carlsberg will take on S&N’s stake in BBH, their fast-growing 50/50 joint venture in Russia and the Baltics, and the firm’s operations in France, Greece, China and Vietnam.

Recent annual results for the firm - its last as an independent group - showed flat profits of £444 million during 2007. An 8% fall in UK profits after the wet summer and the impact of the smoking ban was offset by a stronger performance from higher growth markets in Russia and India.

Faltering consumer confidence and a “very challenging” Christmas has put Woolworths under heavy pressure although annual results on Wednesday should see its high street business return to profit.

Management said in January that the operation, which has around 800 stores, was likely to post a small profit after slumping to a £12.9 million loss in the previous year.

The turnaround reflects a focus on cost controls and the sale of more profitable items. The 3.2% fall in like-for-like sales in the 49 weeks to Jan 12 saw a move away from electrical goods such as flat screen TVs which have seen fierce discounting.

But how far this revival can be sustained in the current bleak trading environment remains to be seen.

Landsbanki analyst Mark Photiades said: “Management’s aim of returning the retail business to sustained profitability looks a tough ask given the current consumer climate, and a potential worsening of macro (economic) conditions.”

Overall pre-tax profits for the group are however expected to be 19% higher at £26 million, consensus forecasts suggest, driven by its entertainment wholesale arm, which sells DVDs and CDs to retailers.

This saw a cumulative sales rise of nearly 47% over the 49 week period, including acquisitions and new customers, and is crucial to Woolies’ prospects.

“The entertainment wholesale businesses generate most of the earnings and the extent to which this income stream can deliver value for shareholders in the face of an ongoing deterioration at Woolworths is pivotal,” Mr Photiades added.

A recovering soft drinks market towards the end of last year should help put some fizz into Irn-Bru maker AG Barr’s annual profits, due on Wednesday.

While downpours dampened trading early last year, research firm Nielsen reported a 4% pick-up in the market during the 13 weeks to December 29 compared with a 3% decline earlier in the year.

Irn-Bru is the UK’s sixth-biggest brand by volume although Cumbernauld-based Barr’s stable includes Orangina, Tizer and Strathmore Water.

It also has distribution deals for other popular drinks including Lipton Ice Tea, and announced a tie-up with US energy drinks firm Rockstar to launch the fast-growing Rockstar drink in the UK during the second half of the year.

The company, which has launched its own Irn-Bru 32 energy drink, increased its presence in the market with the acquisition of sports drink maker Taut in January.

Shore Capital analyst Andrew Blain is expecting pre-tax profits of £22 million, compared with £19.1 million the previous year.

He said: “The company is anything but a one trick pony, using its most famous brand as a platform from which to launch into new, high growth categories within the soft drinks market.

“For a steady long term growth and reasonably defensive play we suggest investors could do far worse.”

Barr employs 900 people with manufacturing and distribution sites at Cumbernauld, Mansfield and Pitcox near Edinburgh.

Film studio Pinewood Shepperton was rocked by the writers’ strike in Hollywood seen at the end of 2007 and beginning of this year, when one of its major films was called off.

The group warned the move - believed to have involved the prequel to 2006’s smash hit The Da Vinci Code - could hit revenues by £3 million, sending shares tumbling.

While the bulk of the impact is set to be felt in 2008, analysts at Cazenove trimmed forecasts for 2007 adjusted pre-tax profits by 12% to £6.5 million after the announcement.

Buckinghamshire-based Pinewood is set to reveal any potential hit to last year’s results in finals due out on Thursday. Aside from the film cancellation blow, production delays had already put revenues under threat, which overshadowed otherwise strong half-year results. Pre-tax profits rose 39% to £2.9 million in the six months to the end of June.

With film production clearly highly volatile, analysts have praised the group’s move towards television business. It has filmed shows such as The Weakest Link and the IT Crowd and the market believes there is greater share support in this more steady TV-based work.

Investors will be hoping for an update on the sale of Virgin Radio in results from Scottish media company SMG on Thursday.

The firm is selling the station to concentrate on its television businesses, including STV in Scotland and Ginger Productions.

According to reports, SMG has two remaining bidders on the shortlist for the station - Absolute Radio and UTV, the Irish company which owns Talksport radio - with a price-tag of around £70 million

Virgin is up for sale for the second time after the first attempt failed to draw high enough bids, although the eventual sale price will fall far short of the £225 million it paid DJ Chris Evans’ Ginger Media Group for the station in 2000.

SMG was previously laden with debts but moved to shore up its balance sheet last year with a £95.1 million rights issue in order to sell Virgin from a position of strength.

It also secured a new five-year, £90 million loan facility in November, which now represents the entirety of its borrowings.

Other disposals include the £62 million sale of its Primesight billboard advertising business to private equity firm GMT Communications last September. Cinema advertising business Pearl & Dean meanwhile is also on the block.

Chief executive Rob Woodward is expected to unveil underlying pre-tax profits of around £4.5 million for 2007 - less than half last year’s £9.7 million.

Mr Woodward, who is looking to cut costs across the group, took over in February last year after a shareholder revolt against the company’s previous board, which sought to merge the business with UTV.

Harry Potter publisher Bloomsbury set the scene for a strong set of full-year results in its last trading statement in January, when it delivered the news that profits were set to beat expectations.

The group is now forecast to deliver pre-tax profits of £17 million for the 12 months to the end of December and is likely not to disappoint when it reports on Tuesday.

Bloomsbury had the benefit of a boost from the seventh and final instalment in the Harry Potter series, Harry Potter and the Deathly Hallows, which was one of the year’s best sellers.

But it also fared well with a range of outperforming titles, such as A Thousand Splendid Suns by Khaled Hosseini, which was featured on the Richard and Judy Book Club, and The River Cottage Fish Book.

A far stronger second half performance - which reversed an 8.5% dip in interim pre-tax profits - is set to see the group’s full year figures get back on track after its profit warning last year.

But analysts continue to raise concerns for the group post-Potter, despite its attempts to show that there is more to the group.

Investec Securities said it was forecasting pre-tax profits to fall to £10.5 million in 2008 as the Potter effect drops out.