19 May 2021 Deal brewing between Heineken and Distell
After years of speculation of a possible deal between the world’s second largest beer group Heineken and SA’s leading wine and spirits maker Distell, is hatching.
On Tuesday May 18 the two groups finally announced they were talking. Distell shares jumped as much as 10%, hitting an intraday record – giving the company a market capitalisation of R33.6-billion ($2.4-billion).
Shares of Heineken advanced 0.9% in Amsterdam, valuing the brewer at 57-billion euros ($70-billion). Discussions are ongoing, though there’s no certainty they will lead to a transaction, Heineken said.
For Heineken, which has struggled to make inroads into the dominant market position enjoyed by AB InBev-controlled SAB, the acquisition of Distell could help it carve out a stronger position in the African drinks market.
Distell produces Klipdrift brandy, Nederburg wine, Amarula cream liqueur, Savanna cider and Bain’s Cape Mountain Whisky.
Remgro, an investment vehicle of South African billionaire Johann Rupert, and Public Investment Corp, Africa’s biggest pension fund, each hold a little more than 30% of Distell.
The PIC increased its stake in 2017 after a shakeup of the drinks maker’s ownership structure, paying R170 a share. That’s 19% higher than Distell’s share price at the close on Monday, before the talks were announced.
An acquisition would be Heineken’s most significant transaction since 2018, when it formed a partnership with China Resources Beer Holdings Co, maker of the country’s best-selling beer.
A purchase would add to $7.4-billion of deals announced in the global beverage industry this year, about 15% less than at this point in 2020, according to Bloomberg.
Heineken is emerging from one of the beer sector’s toughest crises. Despite gains in Vietnam and Mexico, the brewer is still facing setbacks in key markets such as Brazil and the UK where restrictions on movement and sales have hurt demand. Earlier this year, the company laid off 8 000 employees.
The brewer surprised analysts in April with stable first-quarter sales as emerging markets made up for declines in Europe.
South Africa was one of Heineken’s best-performing markets, which is surprising given the country’s recurring ban on alcohol.
Any deal for Distell would see Heineken CEO Dolf van den Brink, who took charge last June, make progress expanding into categories that have historically been more profitable than brewing, including liquor.
It will also accelerate the decades-long strategy of his predecessor Jean-Francois van Boxmeer. During his tenure, van Boxmeer sought to tap growth opportunities in Africa, investing hundreds of millions of euros in promising markets such as Cote d’Ivoire, Nigeria and South Africa.
Local fund managers and shareholders are adamant that Heineken will have to offer a significantly higher valuation if it hopes to do a deal.
Competition concerns
A deal with Heineken, which is the number one cider producer in the world, could raise competition concerns given the prominence of ciders in Distell’s portfolio.
Distell’s powerful performance in the cider market with brands such as Savannah and Hunters has propelled it to the world’s number two slot in this category.
However this means that unless the merging parties are able to persuade the local competition authorities that it should focus on alcoholic beverages – where AB InBev dominates – rather than individual categories, the merged entity might be required to offload one of Distell’s most attractive businesses.
Vivian Imerman’s Vasari Beverages looks like one of the very few possible buyers. In 2016 Vasari acquired the operational assets of KWV, one of the oldest spirits and wine producers in South Africa.
This would not be the first time the competition authorities have played a role in Distell’s life.
In 2016 the Competition Commission stated that one of the conditions before it would approve the acquisition of SABMiller by AB InBev, the world’s largest beer group, was the sale by SABMiller of its 27% stake in Distell. SABMiller sold the stake to the Public Investment Corporation (PIC) for a speculated R170 a share.
That SABMiller had a significant stake in a non-beer drinks group was itself the result of demands made by the competition authorities several decades earlier.
Last year the Distell board, led by chair Jannie Durand of Remgro, assured long-suffering shareholders that years spent investing in acquisitions, enhancing production capacity and beefing up its sales force would soon pay off.
The group has invested heavily in boosting its African footprint and earlier this year informed shareholders that its products are now being sold in 37 500 outlets in Africa, outside SA, Lesotho, Namibia, Botswana and Eswatini – up from 9 000 two years ago.
It is planning to grow its footprint to 250 000 outlets within five years.
Source: Bloomberg.com, MoneyWeb.co.za