Glass half full
Heineken offer is no surprise but Distell anchor shareholders Remgro and PIC, aware of long-term potential, won’t be keen
ý Dutch brewing giant Heineken’s tilt at Stellenbosch-based liquor group Distell will need to come at a stiff premium to the current market value of around R32bn.
A successful deal with Distell would give Heineken a sprightly cider category to complement its mainstay beer brands, as well as a valuable route to market in several African countries.
Fortunately a potential deal is well-timed, with Distell managing to reinforce its recent profits with a strong showing in other African markets (Kenya, Angola, Namibia, Tanzania, Mozambique, Ghana and Nigeria) that offset the disruptive effects of Covid booze bans in SA.
The Heineken move is not terribly surprising. There was a good deal of murmuring about Distell being a takeover target after the Covid outbreak last year.
In November last year the FM raised the distinct possibility of Distell attracting a larger offshore suitor (see “Distell’s cider pitch could raise spirits,” Money, November 5).
However, Distell has two formidable anchor shareholders that are acutely aware of the long-term potential in the business.
It has, in recent years, been reshaped into a nimbler, more innovative contender under the guidance of former SABMiller executive Richard Rushton.
Both shareholders — Remgro, which holds a 31.8% stake but speaks for 56% of the voting control, and the Public Investment Corp (PIC) – will not be keen sellers.
Remgro has long been a controlling shareholder of Distell’s liquor assets, and facilitated the merger between Stellenbosch Farmers Winery (SFW) and Distillers Corp in the late 1990s. Remgro has never indicated any willingness to dispose of its holding in Distell. The investment company is well aware of the brand value in Distell, and would probably require a sizeable premium to relinquish its shareholding.
Remgro may possibly negotiate an equity swap, taking a minority stake in the €57bn Heineken.
Some readers might remember that the old Rembrandt Group (a forerunner of Remgro) famously swapped its controlling stake in cigarette giant Rothmans International into a minority stake in the much larger British American Tobacco.
The PIC, on the other hand, is believed to have paid around R170 a share when it bumped up its stake in Distell to 31.7% by buying out AB InBev’s 26.4% stake in the liquor group in late 2016. For an honourable exit, the PIC will need a frothy buyout pitch considerably higher than the current share price. Traditionally, large liquor groups have commanded a premium price in buyout deals. In 2016 Hosken Consolidated Investments managed to facilitate the sale of KWV’s markedly less profitable wine and brandy assets at a considerable premium to Viv Imerman’s Vasari Global liquor business. The purchase price of R1.15bn was far in excess of KWV’s “market” value as inferred by its unlisted share price at the time. Observers in the liquor industry reckoned that Heineken’s price would depend on how badly the brewing giant wanted Distell’s dominant cider brands, Savanna and Hunter’s Dry, as well as the potential tagged to the fledgling positions in various African countries.
Some market watchers believe it would be difficult for large international groups to replicate Distell’s African presence without incurring major costs and taking substantial operating risks.
In the past five years alone Distell has spent more than R6bn on capital projects — mostly upgrading the manufacturing footprint in SA and in other key African markets.
Last year Rushton said Distell had always aimed at building, in Africa, another market the size of SA’s.
The group’s cider market dominance in SA — which could be replicated elsewhere in Africa — would also be tough to dislodge.
Heineken owns the Strongbow cider brand, which, anecdotally, does not seem to have rattled Savanna and Hunter’s in SA.
Interestingly, Distell’s cautionary announcement refers to Heineken potentially acquiring the majority of its business.
Heineken plays largely in the beer, cider and malt markets, and has no spirit or wine hubs.
Roughly one third of Distell’s business comes from its cider brands with the group still holding large positions in spirits (Amarula, Klipdrift, Richelieu and Bain’s) and wine (Fleur du Cap, Nederburg, 4th Street, JC le Roux and Durbanville Hills).
The term “majority” suggests Heineken will be negotiating to buy a good chunk of the spirits and wine brands too.
In a note to clients, Credit
Suisse argued that the Distell tilt was consistent with new Heineken CEO Dolf van den Brink’s strategic shift to further embrace adjacent categories to beer as well as strengthen its portfolio and its route to markets in Africa.
What Heineken would probably accelerate is Distell’s ventures into ready-to-drink (RTD) variants and hard seltzers as well as low- and nonalcoholic derivatives.
Rushton has placed an emphasis on brand innovation in recent years. Lately there have been a lot of new products from Distell, mainly across the cider and RTD categories.
Credit Suisse noted that Heineken has a great track record of integrating acquisitions in emerging markets .
These have notably been in Mexico, Southeast Asia and Brazil over the past decade.