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S&N buys 26% of UB beer business

Britain's biggest brewer, Scottish and Newcastle Plc, on Wednesday agreed to buy a 26 per cent stake in the beer business of India's United Breweries in its first move outside Western Europe.

S&N, brewer of Kronenbourg, John Smith's and Foster's in Europe, is buying loan stock and preference shares with an option to convert into a 26 per cent stake in the beer business of India's top brewer, which is to be demerged from the rest of the UB group, and which makes Kingfisher beer.

In addition, S&N and UB will each own 40 per cent of a new joint venture set up to develop and acquire brewing businesses, while the independent management team of the venture will own the remaining 20 per cent share.

Scottish & Newcastle said in a statement it will spend around £60 million ($86 million) on the investment in an Indian beer market which has grown by 10 per cent per annum since 1995, and is set to grow faster with future deregulation in some Indian states.

The annual Indian market at 5.5 million hectolitres is small beer compared to the British market at around 59 million hectolitres, but India is set for fast growth while the mature British beer market is contracting by around one per cent a year.

Indian annual per-capita beer consumption is currently low at 0.5 litre even compared to the other big emerging market growth area, China, at 18 litres.

SHARES FALL

S&N shares dipped on worries S&N may be overpaying to enter new emerging markets where it has no experience. The stock, which went ex-dividend on Wednesday, ended off two percent at 544 pence, while UB shares closed off 3.6 per cent at Rs 230.45 in Mumbai.

Drinks analysts in London said the move would dilute S&N's traditional European focus and give the group exposure to growth markets, but that it may struggle to succeed in this new market.

"In our view, this deal is just not big enough to alter our low risk recommendation but equally it will not solve the company's lack of growth," said analysts at brokers Schroder Salomon Smith Barney.

The UK group was one of a number of brewers that were looking at an alliance with UB, including Belgium's Interbrew and London-listed South African Breweries Plc, as UB looked for a strategic partner to bring international brands to India and help the group market its well-known Kingfisher beer brand abroad.

But the other two international brewers were interested in a 50 per cent stake and management control of UB, which the Indian company's chairman, Vijay Mallya, was unwilling to hand over.

UB said that S&N will market its international brands, such as Kronenbourg 1664, through the strategic alliance in India while S&N will distribute Kingfisher globally.

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