Russia: Baltika announces the proposed merger of Russian assets

Baltika Breweries addressed on September 9 a letter to its shareholders and the general public regarding its proposed merger of Baltika with the Pikra, Vena and Yarpivo brewing companies whose majority owner is Baltic Beverage Holding AB (“BBH”). BBH is a 50:50 owned joint venture between Carlsberg Breweries A/S and Scottish & Newcastle plc.

Baltika’s goal is to develop the company into the largest and most professional consumer goods business in Russia. The proposed merger is a natural evolution for the company and will help ensure that Baltika is well placed to continue to enjoy success in the future.

BBH is currently facing a court case brought by minority shareholders in Russia opposed to its plans to consolidate the ownership of the three Russian breweries -- Yarpivo, Vena and Pikra -- into an enlarged Baltika.

The principles of the proposed transaction are:

The proposed legal merger will be subject to the approval of Baltika minority shareholders;

Minority shareholders will receive detailed information on the proposed legal merger prior to any EGSM votes. The Board of Baltika also intends to provide information on the advantages of the legal merger and an indication of its future dividend policy;

The Independent Directors of Baltika have agreed to appoint an independent appraiser of established credentials to conduct a full review in order to determine the value of Pikra, Vena and Yarpivo as well as Baltika in connection with the proposed merger. The Board are also appointing an independent financial adviser to assist them in ensuring that these valuations are properly conducted and fair;

It is the intention of the Board of Baltika that Baltika, Pikra, Vena and Yarpivo shareholders will each have the option to take shares in the “enlarged Baltika” OR to take cash; and,

The BBH Board of Directors has stated BBH’s intention to take shares, not cash, in the enlarged Baltika in exchange for its holdings in Yarpivo, Pikra and Vena. This ensures that Baltika’s debt, post merger, will remain low and demonstrates BBH's commitment to the business and to the Russian market.

Baltika is determined to communicate in an open and constructive manner with its shareholders and will provide detailed information about the proposed merger in advance of any shareholder meeting.

The attached letter:

TO: JSC Baltika Brewery Shareholders
FROM: JSC Baltika Brewery Board of Directors
DATE: September 8, 2005

RE: Proposals on Principles of Merger Plans

The Board of JSC Baltika Brewery (“Baltika”) is pleased to announce that it has established a set of principles for an enlargement of Baltika through a legal merger with Pikra, Vena and Yarpivo brewing companies. Like Baltika these companies are majority owned by Baltic Beverages Holding AB (“BBH”). These principles were agreed by the Baltika Board, which includes independent directors and BBH nominees, on 7th September, 2005. The purpose of the proposed merger is to create one strong organization under the name of Baltika, to the benefit of all shareholders.

Rationale and Outlook

Over the last year, Baltika has been working closely with the Pikra, Vena and Yarpivo brewing companies to enhance working practices, customer relationships and profitability of Baltika. Our goal is to develop Baltika into the largest and most professional consumer goods business in Russia, and the proposed merger is a natural evolution for the company that will help to ensure that Baltika is well placed to continue to enjoy its great success in the future.

Principles of the Merger

1. Transaction valuation

Any merger will be proposed on terms considered fair by the Independent Directors of Baltika and supported by an independent valuation. The Board of Baltika have therefore decided (a) to appoint an independent appraiser of established credentials to conduct a full review in order to determine the value of Pikra, Vena and Yarpivo as well as Baltika in connection with the proposed merger and (b) to appoint an independent financial adviser to assist the Board in ensuring that these valuations are properly conducted and fair.

2. Fairness between all shareholders

Baltika is keen to ensure that any merger is effected on a basis that is fair to all shareholders in each of the companies concerned. BBH will be treated on the same basis as all other shareholders in this process.

3. An opportunity for all shareholders

It is the preference of the Board of Baltika that in any merger all shareholders in each of the companies (including shareholders in Baltika) should have the right, at the merger value, to take either cash consideration or shares of an equivalent value in the enlarged Baltika.

4. Opportunity for Baltika shareholders

All shareholders of Baltika will have the ability to retain their investment in what will be a significantly larger, stronger and more efficient company. As an alternative it is the expectation of the Board of Directors of Baltika to offer shareholders in Baltika the opportunity to realize their investment through a cash offer at the merger value of Baltika. These opportunities will be subject to the approval of the merger by a majority of the minority shareholders in Baltika at a Baltika EGSM.

5. BBH’s long-term commitment

The BBH Board of Directors has confirmed to the Baltika Board that BBH will take shares in the enlarged Baltika in exchange for its shares in Pikra, Vena and Yarpivo. On this basis, Baltika would not be required to pay cash for BBH’s holdings in Pikra, Vena or Yarpivo. This illustrates to the Baltika Board BBH’s long-term commitment to Baltika and to the Russian market, and it ensures that Baltika’s debt will remain at a low level under any of the potential results of the merger.

6. Communication with shareholders

Baltika is dedicated to communicating in an open and constructive way with its current and potential shareholders. The company will, to the extent possible, provide detailed information about any proposed merger to help enable shareholders to take a view on their options. The Baltika Board expects to be able to present to all shareholders the expected advantages that would emerge from a legal merger and an indication of Baltika’s future dividend policy prior to putting any proposals to an EGSM. Following the completion of the valuation and appraisal of a legal merger, Baltika looks forward to communicating further with shareholders.

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