Bucking a trend?

Scottish & Newcastle did rather well in 2006, particularly in 'developing' markets. Its East European Baltic Beverage Holdings venture saw a 64 per cent rise in operating profits and S&N expects moves into India and China to sow seeds for future growth.

Other factors caused John Dunsmore, S&N's UK managing director, to smile when presenting the group's results last week. There was S&N's free cashflow figure of £353m, much of which came from its operations in the UK and France, markets deemed by many as being past their sell-by date.

Then there was the 7.5 per cent return on invested capital, beating the group's weighted average cost of capital by half a percentage point - the first time S&N's ROIC has beaten its WACC since it began building its international platform back in 2001.

And while the UK beer market was in decline, S&N brands were bucking the trend, such as Foster's, up nearly nine per cent against a market segment rise of 1.7 per cent. Despite the success of the 'M' word, S&N was still the guv'nor in cider, Dunsmore added, spiritedly. Even the "very significant" impact of the smoking ban won't last forever. All good stuff.

However, there are two sides to a coin. While S&N has managed to maintain its momentum in a tough market, the multi-million pound cost-cutting programme announced last week illustrates there is slack to be taken up. Other brewers of S&N's scale are sure to be suffering from similar operational issues. Predictably this suggests there is a consolidation opportunity for someone out there and S&N has been a merger candidate for some time.

While there are 'names in the frame' for a potential S&N suitor, it'll depend on how these see the balance between revenue generated (or not) in developed and developing markets. Either way, expect this one to run…