The king of good times can look forward to better times. That’s precisely what the deal with Heineken promises for Vijay Mallya’s United Breweries, India’s largest liquor company.

And it’s not Mallya alone who was celebrating earlier this month after signing the deal, under which UB will brew and market the beer brands, Heineken and Cannon 10,000, in India. In turn, Heineken will make and sell the Indian company’s largest selling beer brand, Kingfisher, in the overseas markets.

Vijay MallyaJean-François van Boxmeer, chairman of the executive board and CEO of Amsterdam-headquartered $17 billion Heineken, says “India is the last frontier in the global beer market as the consumption here is about to explode”.

Boxmeer is bang on. India’s annual per capita consumption of beer is just around 1.3 litres, compared with more than 50 litres in developed markets. The Indian beer market at 14.4 hectolitres is valued at Rs 3,000 crore and is growing by 9 per cent, with UB controlling 48 per cent market share.

That number is expected to sky-rocket on the back of a rapidly growing upper middle class, favourable demographics, strong economic fundamentals and a shift from other alcoholic beverages.

The expectation is that Heineken will make a splash in India in the summer of 2010. During the past few years, the beer was available in India through a joint venture in Singapore, but was selling in miniscule numbers only at a few duty-free shops in India.

UB executives say Heineken will continue with its global tradition of positioning the beer at the super-premium segment

Many, however, say it’s certainly not going to be roses all the way. Heineken will have to contend with Peroni, Carlsberg and Tuborg which have a decent head start at the premium end of the Indian beer market, which is estimated at 6 per cent of the total beer market.

But independent brand analysts counter this by saying that Heineken has an advantage in India, given the fact that the brand has a high recall in the premium category and also the aspirational value it comes with.

“There are as many as 20 beer brands which I can think of,” says Harish Bijoor, a noted brand consultant, “and Heineken is a brand with a gold standard. I guess that initially there will be a cold launch where the brand will be seeded, a natural demand built up and then the market will be warmed up with an aggressive marketing push within a period of six to eight months.”

While Heineken will get a sturdy distribution network in India, UB’s plans to take its own brand Kingfisher will also get to see a few positives. “UB has been trying to establish its flagship brand Kingfisher beer globally but has not been really successful. Its earlier strategic pact with Scottish & Newcastle did not help either,” say industry analysts.

UBL, which sold 82 million cases in the last fiscal, has a small presence overseas with brewing facilities in the UK, US and New Zealand. “UB’s international revenues are small and growing. We seek to ramp it up significantly through exports and local brewing arrangements in Heineken’s facilities,” says Mallya while not specifically commenting on the percentage of UB’s revenues that comes from outside of India. “India is a big enough market and we are yet to tap its full potential,” he adds.

If all these weren’t enough, UB’s expansive beer portfolio may also see the addition of the ‘Tiger’ brand, if it decides to engage with Asia Pacific Breweries for licensing it in India.

The deal details

During January 2008, Heineken indirectly acquired a 37.5 per cent stake in United Breweries Ltd (UBL) following a worldwide takeover of Scottish & Newcastle’s (S&N) brewery business. S&N was an equal partner in the joint venture with UBL. UBL declined to offer Heineken equal rights on its board as it (Heineken) had another joint venture with Singapore-based Asia Pacific Breweries which competed with UB’s brands in India. Mallya made it clear that Heineken should resolve the conflict of interest by operating only through UBL, else it can as well be a passive shareholder.

APB India sold beer brands Tiger, Cannon 10000 and Heineken in India and has brewing facilities in Maharashtra and Andhra Pradesh with a capacity to brew 460,000 hectolitres a year.

In a series of transactions, Asia Pacific Breweries, Singapore sold its wholly owned subsidiaries, Asia Pacific Breweries (Aurangabad) and Andhra Pradesh-based Asia Pacific Breweries-Pearl- with annual sales of over two million cases- to Heineken International for a total consideration of $51.9 million.

Heineken will now integrate these breweries in 2010 and Asia Pacific Breweries has agreed not to re-enter the Indian market.

The beer-maker agreed to a key demand by Mallya that it merge its Indian joint venture arms into the United Breweries fold for Heineken to get equal representation on the board of UB, India’s largest brewery firm.

The Heineken brand is likely to be launched by the beginning of the summer season of 2010, the company has said. UBL will receive a licensing fee.

Vijay-Mallya Heineken will be sold through the same UB network as distribution of beer and liquor is common. Heineken, on its part, will use its global distribution system to market the Kingfisher brand in overseas markets.

Heineken became a 37.5 per cent shareholder in UBL after it bought this stake from UK-based brewery firm Scottish & Newcastle in a global deal in January 2008. After the deal, however, it was not allowed to become an active shareholder and leverage UB’s distribution strength since it had a joint venture with Singapore’s Asia Pacific Breweries (APB), which was in direct competition to UB’s brands like Kingfisher in India.

APB’s portfolio of brands includes Tiger Beer, Heineken Anchor and ABC Stout. It operates breweries in 12 Asian countries and exports to more than 60 countries.

Heineken will now acquire Asia Pacific Breweries (APB) India comprising Asia Pacific Breweries (Aurangabad) Pte Ltd and Asia Pacific Breweries-Pearl Pte for Rs 174 crore. Once this transaction is completed in the first quarter of 2010, Heineken intends to transfer these businesses to UBL. APB is a joint venture between Heineken and Fraser & Neave Ltd.

APB brands will now be present in India directly from ABP Singapore and not through APB India. UBL, however, has the option to license and sell the Tiger brand in India, an issue on which it will take a call later.

Terming India the “last frontier of the global beer market”, Jean-François van Boxmeer, chairman of Heineken’s executive board and CEO, said a strong Indian presence is important to the company to increase its exposure to and growth from developing markets.

Mallya said the agreement with Heineken would help UBL further its leadership in the Indian market in the years to come.

UBL reported a net of Rs 62 crore on a topline of close to Rs 1,700 crore in the past fiscal and had a market share of 48 per cent. For the half year ended September 30, UBL’s sales volumes grew by 16 per cent against an industry growth of 8 per cent.

Heineken will also merge its interest in Millennium Alcobev Private Limited (MAPL) into UBL. Heineken holds 50 per cent equity in MAPL with the other 50 per cent held by UBL.

This was the joint venture through which Scottish & Newcastle (S&N) first invested in India and has been managed as part of the UBL’s business following the direct investment in UBL by Scottish & Newcastle in 2004.

S&N had a 50 per cent share in this joint venture, which Heineken inherited and which it will now transfer into UBL.

Under the new shareholder agreement with UBL Heineken will have the right to nominate three members of UBL’s eight-member board, including the executive position of Chief Financial Officer.

Following a UBL board meeting today, Heineken nominee Guido de Boer was appointed chief financial officer. René Hooft Graafland, a member of Heineken’s executive board and CFO, and Siep Hiemstra, regional president, Heineken Asia Pacific, were appointed non-executive directors.