What R10bn Heineken writedown says about SA
The world’s second-largest brewer, Heineken, overpaid for Distell. While the recent writedown of its SA and Namibian assets is barely more than a rounding-off error for a €50bn behemoth, it does not send out a good message about SA Inc.
Heineken announced on Wednesday that it had impaired €491m (R10bn) or 16% of its SA business. This is likely to include some of the Distell brands it bought in 2023 and not just the local beer business and the Namibian brewery that produces Windhoek, among others.
Distell’s brands include JC Le Roux sparkling wine, Savanna and Hunters Dry ciders as well as Klipdrift brandy and 4th Street wines.
International accounting rules dictate that firms must assess the value of their assets annually and ensure they are recorded fairly in the books. In part, the writedown was due to rising interest rates that affect the cost of capital and present value of an asset, the firm said. The cost of doing business had also increased.
But it also had to do with lower sales and consumer confidence. Even South Africans, known for their high liquor consumption, are drinking less or buying down and avoiding big brands.
Results for the 2023 Heineken calendar year show a single-digit fall in sales.
When in November 2021 Heineken announced its R40bn offer for the Distell businesses, chair and CEO Dolf van den Brink described it as a “vote of confidence in the long-term prospects of SA and Namibia”. Market watchers might wonder if that statement still holds true.
SA investment holding company Remgro owns about 9% of SA Heineken Beverages. Its share price dropped slightly, about 2% the day after the announcement. It will be marking down some of its assets.
Though firms worldwide frequently overpay for companies they acquire, it sends a poor message about the value of SA’s assets. Trade, industry & competition minister Ebrahim Patel might want to remember this — after working hard to extract every possible rand from Heineken.
The deal was finalised in April 2023, almost 18 months after it was announced, due to a protracted Competition Commission process.
One condition imposed by the commission was setting up an employee share-ownership scheme that transferred more than R3bn of equity to workers of the merged entity’s SA operations. There was also a five-year moratorium on retrenchments of employees under specific managerial grades.
The new merged firm had to commit to R10bn over five years to increase the production of alcoholic beverages in SA.
It needed to spend R3.8bn on a new brewery and R1.7bn on a new maltery or buy supplies in such a way that a new maltery would be developed. It had to put R400bn into a supplier development fund and donate R200m to a fund that was earmarked to support the government’s economic recovery plan.
Almost a year after the deal finally closed, SA is looking even more unattractive.
Rand weakness, the high interest or yield the government must pay on bonds and capital flight out of SA show what foreigners think of the country.
With such a need for foreign investment, Patel might take note of the Heineken impairment and how unattractive SA has become. Perhaps the competition authorities need to stop extracting their pound of flesh?