THE GIST
Carlsberg UK and cask-focused brewery Marston’s have merged in a deal that will have wide-reaching consequences for the British brewing and pub industry.
The merger will offer Carlsberg brands access to Marston’s 1,600 pubs and will be a relief to the debt-stricken Marston’s, which owes £1.39 billion to creditors. However, it casts doubt on the future of the 11 other breweries and brands it owns, including the 50,000-hectoliter (43,000-barrel) Wychwood Brewery—home of Hobgoblin—and much-loved regional brands like Jennings Brewery and Ringwood Brewery.
Marston’s’ pub business is not part of the deal, but written into the agreement is the guarantee of a supply arrangement for Carlsberg brands. The merger creates the new Carlsberg Marston’s Brewing Company, 60% of which is owned by Carlsberg UK, with Marston’s receiving the remaining 40%. Marston’s also receives £273 million in cash, which places the value of the brewing side of its business at £580 million.
Investors are hardly cashing in: the injection is only a fraction of that £1.39 billion debt, which Marston’s was attempting to finance by selling hundreds of pubs. Its need for cash is clear: just before the sale, Marston’s’ share price had collapsed to 32p. That’s down from over £1 in February 2020, and is due to the COVID-19 crisis closing all its pubs. £34 million of the cash will be deferred until an “agreed basket” of Marston’s’ businesses return to pre-COVID-19 share values.
WHY IT MATTERS
Marston’s is the third national cask brewer to have been snapped up by a multinational corporation in barely a year—each time at a discount due to turmoil in the British economy.
In January 2019, Asahi bought Fuller’s’ brewing business for £250 million, while Hong Kong property firm CKA paid £2.7 billion for Greene King’s brewing arm and pub estate in August. Brexit has suppressed the pound since the U.K. voted itself out of the European Union in June 2016, effectively making these real estate transactions more attractive to foreign investors than ever. Combined with the share price drop from COVID-19, this merger shows Carlsberg getting the best deal of the lot.
It does, however, provide some degree of certainty and liquidity for Marston’s as the world heads into recession. John West, EMEA managing editor at financial news service Mergermarket, believes the merger is as good as it was going to get for the brewery.
“Ever since Fuller’s sold its brewing business to Asahi and Greene King was bought by CK Asset Holdings, Marston’s’ shareholders would have been questioning what management could do to join the party,” he says. “It seems to square the circle for Marston’s. [It] ticks the box of generating cash and de-risking the business, but also retains more than a merely contractual relationship with beer production.”
For Carlsberg the benefits are clear: with competition for taplines bound to intensify as potentially thousands of pubs are either unable to open or close for good after COVID-19, having another 1,600 pubs tied into a supply deal will keep Carlsberg brands growing.
This is beneficial for Brooklyn Brewery, which signed an exclusive distribution deal with Carlsberg UK in 2016. Since leaving independent distributor James Clay and Sons that year, and thanks to increased pressure from local breweries, Brooklyn Lager has seen a huge drop in U.K. sales. In 2019, its volumes declined by 12%, for the first time falling behind Camden Town Brewery’s Pale Ale and Marston’s own Shipyard American Pale Ale.
The recovery of Brooklyn, as well as the continued growth of the new Carlsberg Pilsner, is clearly at the forefront of Carlsberg UK’s mind. In a document sent to investors of both businesses, Tomasz Blawat, managing director of Carlsberg UK, said: “Our intent for the Carlsberg Marston’s Brewing Company is for it to become a platform for growth for all of our customers and suppliers, offering a bigger beer portfolio of complementary international, national and regional brands.”
The deal is not without its controversies, though. Beer writer Roger Protz took to Twitter to express his concern, particularly around how Marston’s’ sub-brands will be dealt with within the joint venture. He called the deal “alarming,” adding he was worried about the fate of Jennings Brewery in Cumberland, as well as the future of the historic Draught Bass.
When approached, a spokesperson for Marston’s declined to be quoted, but denied there are any plans to close breweries, despite the investor document pointing to £24 million worth of savings to come from “overhead costs, brewery and logistics efficiencies.”
Marston’s is also the biggest pub estate owner yet to cancel rents for its landlords, who are still unable to open their pubs and are unlikely to do so for another two months. Owners are already wondering—without much hope—whether this sudden cash injection might mean extra support.
“It wasn’t done to make tenants better off,” says Ed Anderson, who runs the Marston’s-owned Railway Tavern in Cheltenham. “I think [the] tied tenant model exists to squeeze maximum amount of cash out of a site with the minimum amount of risk, and it’s the tenant’s hard work that makes this possible. That’s not going to change.”
Finally, Marston’s was at the center of what’s now called the “72-pint controversy,” where the U.K. government’s Pubs Code Adjudicator found the brewery had misrepresented the number of pints in its casks. The story was significant not only because Marston’s was knowingly shortchanging its landlords, but because its pub rents are calculated based on the estimated volume of beer sold—and therefore, in many cases, on beer that never existed.
Anderson was the landlord involved in that case, and recently won a High Court order forcing Marston’s to produce rental calculations using the correct amount of beer. The brewery is appealing the decision because if it shows Anderson’s rent would decrease, it could be open to thousands of lawsuits and rent reviews that would eat into the money earned through the merger.
Before the deal, there was some hope that Marston’s’ financial difficulties and legal issues might result in the sale of some of its estate, which would raise the prospect of hundreds of pubs going free of tie. That seems unlikely now that its finances have stabilized.
Words by Jonny Garrett