Jul 08, 2005: Razin Buy Gives Heineken Brewing Space

By Yuriy Humber
STAFF WRITER

Heineken will solve its production capacity limitations and become the top-selling brewer in St. Petersburg after acquiring city-based rival Stepan Razin, the Dutch brewer said Thursday.

Heineken N.V. bought a 100 percent stake in the St. Petersburg brewery for an undisclosed sum - a move that the country‘s No. 3 beer-producer said will lift its production to 8 million hectoliters.

Analysts value the deal at close to $100 million and say the country‘s most aggressive player on the beer market has invested wisely. Apart from adding economy-class brands to broaden its manufacturing portfolio, Heineken has acquired a brewery with growth potential.

"The intention is to extend our presence in the medium term," Heineken‘s press office said Thursday.

"Since the current utilization rate at the Heineken Brewery LLC in St. Petersburg is very high, there might be capacity constraints ... we are acquiring breweries in order to spread the capacity further," the press service said.

Heineken‘s Bravo factory in St. Petersburg has a 5.3-million hectoliter cap on the production volume and brews Heineken, Bochkaryov, Okhota and Loewenbrau under license.

Stepan Razin will lend three brands, Stepan Razin, Kalinkin and Ordinar, and a further 2.5-million hectoliter volume to the Dutch brewer. After "investments have been put in to upgrade the brewery accordingly," the Dutch firm will also use the Razin facility to produce Heineken and Bochkaryov, the press service said.

Despite the addition, Heineken‘s volumes will still trail Baltic Beverage Holding‘s Baltika, the country‘s largest beer producer, which has a 10-million hectoliter capacity in St. Petersburg.

In terms of sales, however, with Stepan Razin being a one-time market leader in St. Petersburg, the Dutch brewer is likely to win out. Currently, Razin holds about 24 percent of the city‘s market, on a par with Baltika. Heineken and Razin sales combined could reach 32 percent, the Dutch company estimates. Moreover, St. Petersburg accounts for 13 percent of the total beer market.

"Heineken have got themselves a stronger foothold on one of the most notable beer markets in Russia," said Alexei Kedrin, spokesman for Baltika. "However, Baltika keeps 24 percent sales rates for St. Petersburg and for Russia in general."

After the acquisition, Heineken said it expects to gain 10 percent of the country‘s market. Nationwide, Stepan Razin has no more than a 2 percent stake, said Yelena Borodenko, consumer goods and retail analyst at Alfa Bank.

"Heineken has been lucky with the timing of the purchase," Borodenko said. She quoted a "fair price" for Stepan Razin as $100 million, a price that Heineken "probably got pretty close to, since they started negotiations with Razin in February, before Ivan Taranov brewery put itselves up for auction and Baltika shares had significant gains."

The brewery market has notably appreciated since, orientated to Baltika‘s rising production to sales coefficient, Borodenko said.

While Heineken‘s purchase is unlikely to unsettle the beer industry, which is already in the process of consolidations, it may put pressure on No.2 brewer Sun Interbrew, Borodenko said. Sun held 15 percent of the country‘s beer market in 2004.

Vyacheslav Mamontov, executive director of the Russian Brewer‘s Union, does not rule out the possibility that acquisitions of Russia‘s few remaining domestic brewers may soon follow.

"Given the current tax legislation, breweries can only survive through consolidation. Small brewers are just crying out to be bought," Mamontov said.