Heineken, UB bury hatchet

Dutch brewer Heineken NV desperately wanted to sample the Indian beer market, but local market leader United Breweries (UBL) was keen to restrict competition in alcoholic beverages.

On Monday, the two sparring companies announced a deal that will take care of their respective needs, at once.

It will give Heineken a wide reach in India through UBL’s distribution network.
It will also help Mallya take on rivals like SABMiller, Anhueser-Busch and Carlsberg more effectively in the domestic market as rivals Asia Pacific Breweries (APB) and Heineken are now in his beer company’s fold.

The two beer companies resolved their year-long dispute, which had cropped up after Heineken bought Scottish and Newcastle, which owned 37.5% in UBL.

When the Amsterdam-based company tried to instate its representatives on the UBL board, Mallya took objection to it as Heineken was distributing its brands through a joint venture with APB.

The deal announced on Monday involves Heineken, Europe’s largest and the world’s third-largest brewer buying the stake of APB Singapore in APB India for euro 25 million and transferring the business, which includes two breweries in Maharashtra and Andhra Pradesh that manufacture the APB brands Tiger and Canon 10,000, to UBL.

Currently, Heineken beer is imported into India and sold only through duty-free and travel retail outlets. Now, Mallya’s beer company will brew, bottle and distribute the Heineken brands in India.

The two companies have also entered into an agreement to merge Millennium Alcobev Pvt Ltd (MAPL), in which both have equal share of 50%, with UBL.

In a conference call with media, the Indian liquor baron said the merger of all the entities into UBL will be completed by the “summer of 2010” after which the rollout of brands will begin.

He said UBL and Heineken had entered into a “standard” licensing agreement and royalty arrangement, but did not divulge the details saying, “The key terms (of the pact) are confidential.”

According to the pact, UBL will get access to Heineken’s distribution and manufacturing facilities in the international markets, which UBL is currently mostly catering through exports, except in the US, the UK and New Zealand. Heineken would also support UBL’s plans to globalise its Kingfisher brand by launching it in the international market.
Now, with the conflict resolved, Heineken has the right to appoint three directors to UBL’s board, including the chief financial officer, under the new shareholder agreement. The equity structure of UBL would remain the same with the Dutch brewer and Mallya holding 37.5% each and the public holding the remaining 25%.

According to industry experts, the deal will strengthen UBL’s portfolio with a strong Heineken brand, which would positioned in the premium segment and so would not cannibalise UBL brands, which are in the regular segment.

“While Heineken accounts for just 1% of the Indian market, it is one of the top three beer companies in the world with sales of 162 million hectoliters of beer annually. In turn, UBL will pay the royalty fees to Heineken,” liquor analyst Nikhil Vora of IDFC-SSKI wrote in a report brought out after announcement of the deal.

He said the deal did not have any immediate financial implication. In terms of brewery capacity, he says APB’s 460,000 hectoliters of capacity in Aurangabad and Andhra Pradesh is just about 7% of UBL’s installed capacity. 

Vora feels the merger of MAPL will have a negative impact at the pre tax level, as MAPL, which markets mass brands like Zingaro and Bullet and has an 8.5% market share, is expected to be incurring losses of Rs20 crore a year.

However, the merger of MAPL would have a positive impact at the profit after tax level, as MAPL has deferred tax assets of Rs100 crore, said the IDFC-SSKI analyst. He said even though the conclusion of the deal addresses the long-held overhang on UBL, the deal is financially as well as strategically neutral from UBL’s perspective.

“More details are awaited on licensing arrangement for Tiger brand, consideration of transferring APB India into UBL and the financials of APB India,” he said in his report.
An industry expert was sceptical. “UBL has followed a very protectionist strategy in the market. We have to see how asset and distribution prioritisation will be done for its own brands and Heineken’s.”

Sandeep Kumar, director — corporate communication of SABMiller India, said Heineken and UBL have had a “loose affiliation for some time now and it was only that it is being made official.” He said the impact of the deal on SABMiller’s business would depend on which price segments the Heineken and APB brands are placed. “We have two brands in the premium segment —- Foster’s and Peroni. I don’t think we need to worry as much as Budweiser (Anhueser Busch) and Carlsberg,” he said.