UK Competition Regulator Initiate Probe in Carlsberg UK-Marston’s JV Deal

Summary

• Competition and Markets Authority has launched a probe into the £780 million merger of Marston’s and Carlsberg’s UK brewing operations
• Marston’s Plc would hold 40 per cent stake in the new Carlsberg Marston’s Brewing Company and would also be receiving £273 million cash
• Recently Diageo had announced to buy a gin brand, Aviation American Gin, co-owned by Hollywood actor Ryan Reynolds

The part of leisure sector constituting, Pubs & Restaurants, even after the gradual easing of lockdown, remain the most impacted due to the coronavirus pandemic. The condition of the segment has long been under pressure as per the data from the Office for National Statistics (ONS), nearly 25 per cent of the pubs have closed since 2001 in UK. With reference to Covid-19, the statistics are yet to be known, but the situation remains worrisome for them. The leisure spaces such as pubs, have been contributing significant revenues to the UK treasury during the pre-pandemic era and hence are considered important for the economy.

The sector is on the brink of collapse, and a vast majority of businesses in the Leisure sector are seeking consolidation to remain afloat, given the prevaling uncertainties in the economy with reference to Brexit and the coronavirus pandemic. The woes seem to continue for the already battered sector as people returning from France and Spain are being forced to self-isolate for a period of two weeks.

Consolidation has been the new norm across the sector. In early June, Marston’s Plc, a well-known pub, and beer brewing business announced a joint venture (JV) with Carlsberg UK. The FTSE All-share listed company was expecting completion of the proposed arrangements to occur in the third quarter of 2020.

However, the UK’s competition regulator, Competition and Markets Authority (CMA) has stated that it would like to investigate the proposed joint venture between Marston’s Plc and Carlsberg UK Holdings Limited. UK’s competition regulator has launched a “Phase 1” investigation to check for imbalances in the sector, which could be created by potential merger and could eventually lead to the lessening of competition.

As a result, completion of the joint venture awaits shareholder approval and clearance from the competition authority and is expected to take place in the fourth quarter of 2020, slightly later than expected. Marston’s Group has sufficient liquidity in place to meet its requirements ahead of the completion and is not expecting any competition concerns with reference to the transaction between the two entities.

Competition and Markets Authority (CMA) keeps a close eye on industry malpractices and competition. The UK watchdog ensures compliance of businesses with the legal framework and encourages healthy competition in the market so that the benefits are passed on to the consumers. The authority denounces anti-competitive activities and other malpractices.

JV of Brewers: Carlsberg UK and Marston's Group

The tremors were felt across the breweries in the UK after Danish brewer Carlsberg and Marston’s announced a joint venture. Under the deal, British pub owner, Marston’s Plc would hold 40 per cent stake in the new Carlsberg Marston’s Brewing Company and would also be receiving £273 million cash from the Danish firm, which would own 60 per cent of the newly formed entity.

The newly formed entity is expected to offer a mix of Carlsberg’s beverages and Marston’s brands such as Pedigree and Hobgoblin. In addition, Marston’s Group would also market Carlsberg beers through its vast network of pubs across the UK.

The potential deal between the breweries could make it hard for small brewers to get the foot in the door, according to the Society of Independent Brewers (SIBA), the trade body representing small breweries.

Over the past decade, the popularity of craft beer in the UK has gone up. Craft beers are flavoured; produced by small brewers in small quantities. These small independent brewers were already facing stiff competition from global brewing giants until the pandemic struck the industry.

This potential merger could add further woes to the emerging craft beer industry. On the flip side, the synergies of both brands could lead them to stay ahead of the competition. The merger could bring efficiency for businesses and wider choices for customers.

The outbreak of COVID-19 had a material impact on Marston’s revenues, which was anticipated to be nearly £40 million in March. Total revenue from Pubs and Bars decreased by 7.2 per cent to £343.3 million. The Group generated a loss before tax of £33.2 million on a statutory basis.

Marston's Plc (LON:MARS), an FTSE All-Share stock closed at GBX 46.20 on 20 August 2020 and has given a YTD return of -64.35.

Other major consolidation in the industry

• Acquisition: Diageo Plc to acquire Davos Brands and Aviation Gin

Diageo, the alcohol giant, announced its agreement to buy a gin brand, Aviation American Gin, co-owned by Hollywood actor Ryan Reynolds through the acquisition of Aviation Gin LLC and its majority owner, Davos Brands LLC. The deal is worth $610 million (€513 million), including an initial payment of $335 million and a further potential consideration of up to $275 million based on the performance of Aviation American Gin over a period of ten years. The move will also see Diageo acquiring Davos Brand’s portfolio consisting of Astral Tequila, Sombra Mezcal and Tyku Sake.

Diageo’s organic operating profit for 2020 plunged 14.4 per cent due to the decline in volume, cost inflation and unabsorbed fixed costs that were partially offset by short term cost reductions and ongoing productivity benefits.

The news of Diageo's acquisition came just two weeks after the manufacturer of Johnnie Walker whisky and Smirnoff vodka stated that their yearly profit had declined by almost fifty per cent as a result of closures of pubs and restaurants, cancellation of sporting events, and a plunge in duty-free purchases that impacted the global demand.

Ryan Reynolds though is very excited for this new beginning and is said to be retaining a stake in the gin brand as part of the acquisition. He became an owner of Aviation Gin because of his love for the taste of Aviation American Gin more than any other spirit.

The Chief Executive of Diageo, Ivan Menezes expressed his joy as he announced the above-mentioned transaction, providing his support for participation in the super-premium gin segment in the United States. He also added that the company was confident that Aviation American Gin will continue to shape and drive the growth of super-premium gin in North America, and also expressed his eagerness to work with Ryan Reynolds and the Davos Brands team to accelerate future growth.

Diageo Plc (LON: DGE), an FTSE 100 stock closed at GBX 2,597.00 on 20 August 2020 and has given a YTD return of -18.41.

Also Read: Diageo Announces Acquisition of Aviation American Gin