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The Czech Beer Brawl Is Coming To A Head (Int'l Edition)

International -- European Business: CZECH REPUBLIC


A proposed merger of two breweries is testing Prague's mettle

It sounds like a match made in heaven. Plans to merge the Czech Republic's top brewery, Plzensky Prazdroj, with No.2 beermaker Radegast would put two of Europe's best-tasting beers under the same corporate roof. Radegast's strong lager was voted Czech beer of the year last year by the Czech Association of Beermakers, while Prazdroj's flagship brand, Pilsner Urquell, has been internationally hailed since pre-communist days as one of the world's great beers.

Instead, the proposed merger is about to become a litmus test of the Czech Republic's willingness to enforce the rules that should govern a fair, open market. In coming weeks, the Czech antimonopoly commission will rule on the legality of the alliance, which would have a dominant 40% share of the domestic beer market. The outcome could send a signal that the Czechs are ready to leave behind the lax regulation hampering their prospects for early membership in the European Union. "We'll be watching to see which way this goes," says Dusan Ondrejicka, director of the EU delegation office in Prague.

Western investors will be watching, too. For years, they have been disgusted by half-hearted regulation in the Czech Republic, where insider trading goes unpunished and state-owned banks collude with their subsidiary investment funds to bilk small shareholders. On the Prague Stock Exchange, high prices say less about corporate earnings than about out-of-control demand. Now, foreigners are fleeing for the more transparent markets of Poland and Hungary.

Britain's Bass PLC, majority owner of the republic's third-largest brewery, Prague Breweries, has filed a complaint with the Czech antimonopoly agency, asking that the merger be blocked. The Prazdroj-Radegast combination's market share would be three times that of Bass's and way above the 30% threshold beyond which the antimonopoly commission is obliged to investigate.

But the merger may go through anyway, because of the government's eagerness to sell its troubled state-owned banks. The deal was proposed by Japanese investment bank Nomura, which is set to buy the Czech government's 36% stake in Investicni a Postovni Banka (IPB), the nation's third-largest bank. IPB and Nomura control 66% of Prazdroj and 58% of Radegast. By bringing them together under a holding company owned by the breweries' shareholders rather than merging them officially, Nomura claims it can sidestep the 30% rule. The tactic has worked in the Czech Republic before.

LEVERAGE. Industry experts worry that the merger would threaten the image of Czech beer as a premium product. Nomura is likely to begin producing for mass export, as it has ready-made distribution in the form of several chains of British pubs. That could hurt the beers' carefully nurtured image of traditional brewing methods and authenticity.

Nomura has a lot of leverage. For five years, Czech leaders have pressured state-owned banks into making bailout loans to decrepit communist-era companies because they fear the social cost of restructuring. But if the Prazdroj-Radegast deal is blocked, Nomura may demand that the state compensate by forgiving IPB's bad debts. The Japanese could even renege on the buyout. Nomura declined to comment.

Nevertheless, blocking the merger may be worth the risk. For too long, the Czech Republic has been seen as a haven for market-riggers. If the government shows that such moves won't be tolerated, it could redeem its reputation--and preserve the integrity of the country's most beloved industry.By James Drake in Prague

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