Only months after cancelling investment in SA, the world’s second-largest brewer, Heineken, is in talks to buy SA drinks producer Distell, its main cider competitor and the country’s largest producer.
The world’s largest cider producer has approached Distell, owner of Hunter’s Dry and Savanna, about buying a majority of the company in a deal that could bring in about R33bn and bulk up Heineken’s presence in Africa.
The potential deal comes as global brewing companies Carslberg, AB InBev and Heineken compete for a share of emerging markets, and after a year in which pandemic-related lockdown restrictions and bar closures worldwide led to plummeting liquor sales.
Dutch-based Heineken has been embarking on a “beyond beer” strategy to broaden its drinks portfolio and has been buying cider producers in Australia and launching alcoholic flavoured waters as some consumers in the US move away from beer.
If it takes place, the deal will entrench Heineken’s position in a market that is increasing hostile towards alcohol companies, with SA the world’s only country to enact 19 weeks of alcohol bans in response to the coronavirus and one that has instituted decades of above-inflation increases in sin taxes.
Health experts have proposed legislation that would ban the consumption of any alcohol before driving, and have proposed instituting minimum prices for alcohol to eliminate the supply of very cheap booze.
Heineken is not unaware of the tricky trading environment in SA, and in 2020 it joined SAB and glassmaker Consol in canning its planned investment in increased production capacity in response to the liquor sales ban before announcing that it planned to cut 70 jobs in the country in January.
However, Keith McLachlan, an analyst at Integral Asset Management, said while the environment would not add to the attraction of the deal, the “economics of bundling the world’s two largest cider producers together is likely [to be] more attractive than many variables counting against the deal”.
The brewer could also be taking advantage of an attractive share price of Distell, which is well below the R170 per share the Public Investment Corporation (PIC) paid when it bought a 26% stake in the company in 2016.
Shares in Distell jumped more than 10% on the news, before paring gains to close 5.03% higher at 150.26 — not far from late 2019 levels before the pandemic-induced lockdowns and alcohol sales bans sparked a selling frenzy that sent the stock as low as R70.50 in April 2020.
“I’ve thought that Distell was undervalued for a while, particularly given that they gained market share in lockdown and reset their cost-base permanently lower,” McLachlan said.
Distell is majority owned by Remgro, an investment heavyweight that has been grappling with a hefty discount to the sum of its parts, and is looking for ways to release value in the valuation gap.
Were Remgro to sell its shares at R170 per share, the price paid by the PIC five years ago, the deal would net about R33bn.
If it is concluded, the deal could be seen as a vote of confidence in the SA economy, whose fragile prospects have been battered by the pandemic, and could boost President Cyril Ramaphosa’s efforts to attract foreign capital.
It would also be the second large-scale buyout of an SA alcohol firm. The world’s largest brewer, AB InBev, bought SABMiller in 2016 for R1.4-trillion.
Bloomberg reports that if Heineken buys Distell, it would be its biggest investment since its $3.1bn (R43bn) purchase of a 40% stake in China Resources Beer in 2018.
The deal would add brands such as Hunter’s Dry, Savanna cider, Klipdrift brandy, and Bain’s whisky to Heineken’s expanding portfolio, and give it a bigger presence in other African markets such as Kenya, Mozambique and Nigeria where Distell logged double-digit annual revenue growth in 2020 despite lockdowns.
“Heineken does not have much presence in these strongly growing markets which Distell is cracking. It sounds like Heineken have aspirations of being an Africa champion,” said Chris Logan, an analyst at Opportune Investments.
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