South African alcohol producer Distell and Dutch brewer Heineken N.V. have confirmed that discussions are ongoing. Distell has further revealed that the talks are about Heineken potentially acquiring majority of the South African company’s business.
Cape-based Distell is the world’s second-largest cider maker, while Heineken is the second-largest beer brewer globally and holds the top spot in Europe. Furthermore, Remgro and the Public Investment Corporation – the state-owned asset manager and Africa’s largest asset manager – have 56% and 20.3% voting rights respectively in Distell.
Namibia Breweries Limited (NBL), which holds a 25% stake in Heineken South Africa, is watching proceedings carefully because any potential transaction between Heineken and Distell will affect the interests of the maker of Windhoek Lager, NBL said in a market announcement.
Analysts said the discussions between Heineken and Distell signalled three things: first, Heineken’s commitment to South Africa and the rest of the continent; second, the Dutch brewer probably wants to strengthen its route-to-market position; third, Heineken is looking to grow its premium offering through product portfolio synergies in the rest of Africa, where Distell dominates and Heineken is yet to breakthrough in some markets, notably Kenya.
“They [Heineken] are very dedicated to the African continent, particularly to South Africa. Depending on what they will acquire, it could be interesting because these markets are generally seen as markets where ‘premiumisation’ is still relatively low,” said a Dutch-based analyst, who asked not to be named because of company policy.
Distell’s strong local spirits portfolio in other parts of Africa would give Heineken good distribution in markets where the Dutch brewer does not have a significant presence…
The analyst also pointed out that in terms of per capita consumption, “there’s upsides.” “In that sense, acquisitions or deals in these types of regions are always welcomed because the growth is not in Western Europe or in North America, but elsewhere.”
Wim Hoste, the executive director of research at Belgian KBC Securities, said: “If you look back a little, they [Heineken] are much smaller than the market leader, which is SAB/ABInBev (ABI). Previously, Heineken had a distribution agreement with SABMiller.”
That distribution deal ended abruptly in 2007, when Heineken lodged a dispute against SABMiller at the International Chamber of Commerce following the latter’s acquisition of a South American brewer.
At the time, Heineken argued that the transaction constituted a material change of ownership at SABMiller, which compromised of the Dutch company’s interests.
Heineken came out victorious and ended – with immediate effect, following an arbitration award – a 40-year licence agreement with SABMiller for the manufacturing and distribution of the Amstel beer brand. Around then, Amstel accounted for 9% of the South African beer market. The end of the licence agreement cost SABMiller $80m in lost earnings.
In 2008, Heineken started building its own R7bn ($519m) brewing facility in Sedibeng, south of Johannesburg, in a joint venture with Diageo.
“Heineken had to stand on its own feet and sell its own brand,” said Hoste. “It’s mainly active in the premium segment. It is a small player versus the powerful market leader.”
Distell gateway to market access
“By looking at Distell, they [Heineken] probably see that as a potential route to strengthen their position in the overall beverage market in South Africa, and also gain more route-to-market access,” Hoste said.
Sanjeet Aujla, an analyst at Credit Suisse, in a recent note shared with The Africa Report, said: “We believe a potential deal is consistent with new CEO Dolf van den Brink’s strategic shift to further embrace adjacent categories to beer, and strengthen its portfolio and route to market in Africa.”
Distell’s premium positioned cider/ready-to-drink portfolio in South Africa would be complementary to Heineken’s existing beer/cider portfolio, and would yield revenue and cost synergies, according to Aujla.
“We estimate Heineken’s South Africa volumes would expand by over 50% to 11 [hectolitres], increasing its market share to 30% (from 18% in 2019), thereby making it a stronger competitor to market leader ABI. Distell’s cider brands could also have international appeal, bolstering Heineken’s global cider portfolio,” Aujla said.
Furthermore, Distell’s strong local spirits portfolio in other parts of Africa would give Heineken good distribution in markets where the Dutch brewer does not have a significant presence, in particular Kenya, where Distell has an estimated 20% share of spirits, Aujla said.
Although some of Distell’s low-end domestic wine portfolio may not be of strategic appeal to Heineken, certain premium international spirits brands could fit well, said Aujla.
Options on the table
The Credit Suisse analyst projected Distell had an implied enterprise value of €2.6bn based on a 30% premium of the company’s share price. He also predicted a debt-funded transaction, which would be 5% of earnings per share, with 1% interest costs.
“We caveat that Distell’s long-term controlling shareholder, Remgro, might prefer equity as opposed to cash in a potential transaction,” said Aujla.
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