AS JOHN Dunsmore's car pulled away into the bleak Edinburgh night, the newly appointed chief executive of Scottish & Newcastle knew he had to play his greatest hand yet.
Just hours earlier, on Wednesday afternoon, the former head of UK equities at Deutsche Bank had received a call from London that advisers working for Carlsberg and Heineken had made contact with his own legal team, Linklaters.
The news emanating f
rom the Danish consortium was that after months of brinkmanship they were finally ready to concede to Dunsmore's 800p-a-share valuation of the company.
Driving home through the rain-soaked city, Dunsmore would have been forgiven if his head was a mixture of emotions. On the one hand his unimpressed poker-like stance had already added more than £2bn to his company's value. But any satisfaction gleaned from persuading the consortium to table an offer of 800p, from a starting point six months ago of 530p, would have been tarnished with the knowledge that he was on the cusp of becoming one of the most shortlived FTSE 100 bosses in history.
Dunsmore knows S&N. He joined its graduate trainee scheme in 1980 straight from Manchester University, before leaving to go into the City. If anyone is aware of the significance of going down as the man who sold Britain's largest major independent brewer, depleting Scotland's handful of blue chip companies from six to five, it is him.
By the time he dialled into Thursday morning's 8am conference call with S&N's legal and financial advisers, including the experienced kitchen cabinet of Sir Brian Stewart, Sir Angus Grossart and Philip Bowman, positive noises of a fresh offer from the consortium were on the table. The battle for Britain's largest brewer had entered its final stages.
"The tone of the meeting was unanimous," said one source. "We always maintained 800p would get them in the door. The consortium could speak at 800p but they had to agree to full transparency. The shareholders had a right to evaluate the financial prospects of BBH before agreeing a deal."
By mid-morning S&N's management, under the guidance of Stewart and Dunsmore, were moving towards an agreed announcement. After a final round of conversations with their London bankers: Nigel Meek and James Arculus at Deutsche Bank, Heino Teschmacher and James Robertson at UBS, and Akeel Sachak and Nick Wrigley at Rothschild's, a statement was issued to the Stock Exchange at 2pm stating that S&N had agreed to open its books.
As one analyst observed: "Coming only three days before the expiry of the takeover panel's put-up-or-shut-up notice, this was brinkmanship indeed."
Within hours, two data rooms had been set up in Linklaters' Silk Street offices – one for Heineken to complete due diligence on S&N's British, European and Indian business, the other for Carlsberg to pore over details of S&N's coveted Baltic Beverages Holding business and its interests in China.
As Friday drew to a close, fresh rumours circulated in the City that a Japanese brewing group, possibly Asahi or Kirin, was preparing a counterbid. With the likes of US giant Anheuser-Busch, which owns Budweiser, and London-listed SABMiller also waiting in the wings, Dunsmore could yet be on the cusp of presiding over a bidding war.
The prize is immense. The acquirer gets his hand on Britain's last big independent brewer, with annual sales of £3.3bn, valuable brewing assets and market share around the world.
It also means S&N – which counts John Smith's, Foster's and Kronenbourg 1664 in its portfolio – will join the ranks of British companies such as ICI, BAA and ScottishPower that have fallen into foreign ownership.
Not that S&N's shareholders care. For them Dunsmore's brinkmanship has been a gamble that looks like coming very good indeed. Speak to any analyst and they will agree. They point to a chief executive who has shown a maturity beyond his years, an experienced management team and a present bid of 800p. Not a bad result when you consider that just six months ago the Danish consortium was initially eyeing up a takeover for S&N at a share price of 530p.
The genesis for the bid came last spring when the charitable foundation that controls Carlsberg announced it was cutting its stake from 51% to 25%, effectively freeing up the Danish company to raise money for acquisitions. In June, Carlsberg's chief executive Nils Andersen went public and said the group had assembled an acquisition war chest of more than £6bn. His comments were backed up by chairman Povl Krogsgaard-Larsen, who noted that a "a major deal is likely".
Carlsberg's rationale was clear. As the brewing industry enters the final phase of consolidation, the Carlsberg foundation wanted to make it absolutely clear that it will not be pushed around by the likes of InBev and Anheuser-Busch.
For months it had been coveting S&N's 50% share of Baltic Beverages Holding, which includes brands such as Baltika, Slavutich and Arsenal in Russia, the Baltics, Ukraine and Kazakhstan. In a consolidating market, where volume and presence determine the agenda, Carlsberg had to secure a strong position.
As one analyst said: "Carlsberg's strategic priority is to ensure that it does not lose its 50% stake in BBH... the only way for Carlsberg to be certain of keeping its 50% stake in BBH is to own 100%. The only way to get 100% is to buy S&N."
The stumbling block was the built in "shoot-out" clause. Designed to prevent a takeover, the clause dictates that if one partner offers to buy the other's 50% share, the latter can acquire the whole company with a matching offer.
To get round this Carlsberg drew up a plan with its bankers, Lehman brothers. Its strategy was to buy the whole of S&N, but to do this it needed a partner. A short-list was drawn up, topped by Heineken.
What followed was a series of clandestine meetings in Amsterdam and Copenhagen between Jean-François van Boxmeer, the chief executive of Heineken, and Jorgen Buhl Rasmussen, who was appointed Carlsberg chief executive in October 2007. Together they sketched out a plan. Carlsberg would get BBH and China while Heineken would get the UK and Western European markets. In the early days only a small number of Danish executives were trusted with the information but as the plan began to take shape the consortium began taking discreet soundings in the City.
The City of London is a notoriously permeable institution. By October, news of the plan had leaked, forcing the consortium to prematurely reveal its hand.
By this time Dunsmore had already been appointed as Tony Froggatt's successor. Snatching a quick half-term holiday in France with his family before taking up his new role, Dunsmore was surprised when he was called away from his lunch to take a call from his chairman Sir Brian Stewart. What Stewart had to say left him speechless.
Stewart informed him that he had just received a telephone call from van Boxmeer informing him that the Dutch company had joined forces with Carlsberg to mount a possible cash offer for S&N.
As one source said, the mood in S&N's group headquarters in St Andrew Square was one of shock and betrayal. "The offer took everyone by surprise," said the source. "Carlsberg was seen as a friendly partner. We had expected a bid from SABMiller but not Carlsberg."
On the flight back to Edinburgh, Dunsmore began sketching out a strategy for S&N's defence. Despite a 20% surge in the share price the response from St Andrew Square had to be swift and to the point.
"Unsolicited and unwelcome" was S&N's strongly worded riposte, adding for good measure that it was "confident in its future as an independent group".
By the end of the week news began to leak out of S&N as to just how far its relationship with Carlsberg had deteriorated. One source told Scotland on Sunday that the board was absolutely furious with Rasmussen and that it was seeking a new partner for its 50-50 joint venture in Russia.
In a heated telephone interview there was talk of "absolutely no going back" to the status quo and of the partnership being "severely undermined". One insider said it would require "a hell of a marriage counsellor" to restore the relationship.
Inside S&N, Dunsmore and Stewart assembled a kitchen cabinet drawing on the board's rich experience. With the likes of Sir Angus Grossart and Philip Bowman, they had at their disposal individuals who had been down the mergers and acquisitions route many times. Bowman in particular knows how to extract value. With S&N's future at stake, but all eyes on the Russian prize, the board let it be known that the battle for Baltika had begun.
Barely a week after Carlsberg had made its intention clear, Dunsmore put his money where his mouth was. In an aggressive move designed to fend off the predators S&N informed the Stock Exchange that unwittingly the Danes had triggered the shotgun clause. The intention was clear. The board at S&N were not going to roll over. If the Danes were going to have any hope of achieving their goal they were going to have to do it on S&N's terms.
As one source close to S&N said: "It is a hell of an experienced team, they (S&N] wouldn't have begun legal action if they didn't think they had a case. This will be a very close fight." The effect was dramatic.
Two days later, on the October 25, Carlsberg came back with an offer of 720p valuing the company at £6.8bn. Again, S&N's management refused to budge. After the now daily 8am conference call with the kitchen cabinet, Stewart and Dunsmore rang the Carlsberg board to tell them in no uncertain terms that the offer was ridiculously low.
This was backed up by a strongly worded statement to the Stock Exchange, which read: "The board, having consulted its advisers, has no hesitation in rejecting this proposal as it substantially undervalues the unique strengths and market positions of S&N.
"This unsolicited and derisory proposal is an effort to get S&N's unique portfolio of businesses on the cheap. We will continue to take all actions to maximise shareholder value. I strongly urge shareholders to take no action."
The stand-off continued into November. By the end of the month, after a second offer of 750p had been publicly rejected by Dunsmore, an ugly war of words ensued. But the tide seemed to be turning.
After a series of investor roadshows analysts were beginning to understand S&N's valuation of its Russian business. Moreover many observers were also waking up to the potential of India, which industry observers say could be bigger than Russia.
Under the consortium's agreement, Heineken would take S&N's near-stagnant UK market and India, where S&N has a joint venture with drinks tycoon Vijay Mallya and the potential value of the business out there is yet to be truly understood.
As Rasmussen petulantly demanded that S&N's shareholders "engage with us," Dunsmore stuck to his guns, arguing that the S&N management team was ideally placed to unlock the potential in BBH and Europe.
"We think he has a legal case," said one City analyst in relation to the arbitration for BBH. Stories began to emerge of a split in the consortium as a rumour spread through the City that Heineken had chosen the wrong partner and was ready to talk with S&N. "Heineken should watch their backs going into partnership with Carlsberg if this is how they treat their partners," said one onlooker.
By the New Year, S&N's share price had risen to 729p. But the market was getting twitchy. As the combined effect of a global credit crunch, a housing market slowdown and a struggling service sector began to wreak havoc in world stock markets many began to question Dunsmore's strategy.
In the present climate a price north of 750p appeared to be a good deal, but if the consortium was scared into walking away the downside wouldn't be worth thinking about. In a Christmas letter to staff, revealed by Scotland on Sunday, Dunsmore admitted as much, informing staff that he was not interested in pursuing a course of action that defended independence at all costs. "If the consortium comes up with a thumping great offer then we may have to talk," he said.
With S&N known to be working behind the scenes on forging new partnerships with the likes of Anheuser-Busch and the private equity firms Texas Pacific and Blackstone, the Carlsberg-Heineken team began to see danger signals. Analysts and shareholders were divided over whether they should pull out or offer the extra 20p to get the two sides around the table. In the end, it was the Danish-Dutch partnership that blinked first. Meetings are now taking place with a view to reaching a deal before a new bid deadline this Thursday.
"It was classic brinkmanship," says David Liston senior beverage analyst at Barclays Wealth. "Dunsmore has played a very good hand in talking up the price. It's a high risk strategy but if he gets to 800p he will have done well."
Dunsmore seems to have achieved his goal. But as any poker player will tell you a bad hand can change things very quickly.
"Nothing has been signed yet, and until it has, who knows?" said one industry observer. There is speculation that if the bid is successful Heineken will retain S&N's marketing and sales hub in the Gyle and that S&N will demand as much.
The directors will almost certainly go and the St Andrew Square headquarters will be sold. As for Dunsmore, he may be out of a job, but he will certainly not be short of job offers.
But even now the game is not yet up. With the Americans and Japanese watching and possibly waiting to pounce, there is no certainty over who will be declared the winner.
