Can S&N turn the game to its advantage?

It's a do or die situation. The wrong result could see you lose everything. But get it right and your future lies in taking on the big guns of Europe. Sounds familiar? Maybe, but this is beer we're talking about, not England versus Croatia. For Scottish & Newcastle, Britain's last independent brewer of any meaningful size, the fight goes on.

Suitors Carlsberg and Heineken, working together as a consortium, continue to brief against the company while insisting their approach is friendly. A source close to Carlsberg, however, has told The Grocer that the pair are nearing the point where their approach becomes hostile.

"It has come to a stalemate," he said. "The consortium's next move is to talk to S&N's shareholders and ask them to pressure the management into talking. That process has already started. Carlsberg wants to engage and believes S&N shareholders will want to avoid doing a Sainsbury's and scaring the bidders away. Shareholders always want to wait and draw out a higher bid, but by the same token they won't want to drive Carlsberg's offer away."

According to S&N, however, this was never a friendly bid. Sources close to the company argue it turned hostile the moment Carlsberg tried to buy full control of BBH, the pair's equal joint venture in Russia, via a consortium bid with another brewer. The Scots say the move broke the agreement of the joint venture between them and entitles S&N to buy BBH at the price it was valued by the consortium.

This is the legal case that will be considered by an arbitration panel and is the reason S&N feels confident it can win the final battle.

In a trading statement to the City last Tuesday, and following its rejection of Carlsberg's improved 750p-a-share, offer, which valued S&N at £7.3bn plus debt, S&N decided to bare its teeth. Some saw S&N's statement as the first hint of a genuine defence, others as nothing more than a profits warning wrapped in bluster.

New chief executive John Dunsmore wowed the press into giving him a generous write up ("750p a share?" he scoffed. "My mother's putting a bid together at that level.") Once an analyst himself, Dunsmore earned applause from his former colleagues at the end of the analyst meeting. Once his back was turned, the City revealed its true thoughts (see right).

Dunsmore has certainly given them plenty of food for thought. He flagged up the sale of its underperforming French wholesale arm for £85m as a way of stemming losses, the increase of cider production in the face of beer's decline and a cost-cutting production deal with US rival Coors. Other cost-cutting moves included the closure of the bottling plant at S&N's Berkshire brewery.

All this equates to the likely loss of hundreds of jobs, but this was needed, said Dunsmore, to ensure "a fundamental step change" in culture leaving S&N "leaner, tougher and faster". In stripping down his company to create shareholder value, "nothing is sacred", he said, though by the same token he was also forced to admit that trading across western Europe was flat, something the consortium immediately pounced on.

But despite the fact a takeover appears to be the fastest way of releasing value to shareholders, S&N may yet hold the winning card.

Carlsberg and Heineken may claim to be talking to S&N shareholders but it was significant that one of the company's largest stakeholders, Legal & General, came out in support of S&N last week.

It is a rare takeover approach when the bidder knows far more detail about the asset being bid for than the shareholders. But Carlsberg and Heineken had refused to sanction the publishing of key information on BBH in an effort to play down its value.

Legal & General's call for greater transparency with which to "assess the merits of the 750p bid" will increase pressure on the consortium to make the next move.

The threat of going hostile will have no effect on a company board hell-bent only on maximising shareholder value. In any case, a source close to S&N says: "S&N has a lot of options here whereas the consortium is running out of them. Carlsberg was late to take legal advice on its move for S&N and its shareholders are starting to feel they could actually lose BBH in the arbitration.

"In the meantime, they will become desperate to put more money on the table in order to avoid losing the arbitration."

The consortium may be claiming a stalemate at this point but in reality, it looks more like S&N is calling the shots.What the City said

Cazenove

We believe that more value can be created through engaging with the Carlsberg/Heineken consortium [than going alone]. We believe such discussions would, contingent on the consortium receiving comfort on the sustainability of SCTN's low tax rate, result in a highly attractive offer in the 780p-800p range.

Citi

We view Scottish & Newcastle's statement as an unimpressive defence document - on balance we retain our view that a takeover is likely in the order of 750-800 pence per share.

Morgan Stanley

The offer of 750p begins to look attractive given a structurally difficult outlook and rising cost base. In outlining cost-saving initiatives, a problem for management is that it is highlighting areas of value that can be accessed by the consortium too.

Merrill Lynch

The downside for Scottish & Newcastle shareholders if it wins the BBH arbitration is that it mentioned it was willing to introduce a minority partner. This would remove the bid premium from the S&N share price, with potential significant downside for shareholders.