Heineken’s long awaited firm offer for cider, spirits and wine business Distell and Namibian Breweries has more to it than meets the eye.
Distell’s share price fell flat on Monday as the fizz quickly escaped on what was seen as a mean R180 per share offer by some investors. But once you uncork the deal mechanics and let it settle like a fine wine, what emerges is the creation of a rapidly growing African liquor brands business with a world- class majority shareholder and manager while providing Heineken with access to a very supportive partner and with control of Distell.
The share ended the day at R170, which accounts for the time value of money and regulatory deal risk being factored in.
What the market might have initially forgotten with the focus on the somewhat ambitious expected offer price of R200 per share is that Remgro does not need the cheque. What it is more interested in is the growth potential this new entity offers.
The transaction comprises a scheme of arrangement and certain initial steps, which will only be implemented if the transaction receives all the required regulatory and other approvals. Judging by the Competition Commission’s recent public interest obsession that is an if with a capital I.
The steps include:
• A recommended offer by Heineken for Distell, which values Distell at about R38.2bn (€2.2bn) and is subject to Distell shareholder approval;
• The proposed acquisition from Namibian Breweries of its 25% shareholding in Heineken SA, which values the whole of Heineken SA at about at R26bn (€1.5bn), and is subject to shareholder approval; and
• The acquisition of O&L’s 50.01% interest in NBL Investment Holdings, the controlling shareholder with a 59.4% shareholding in Namibian Breweries. Heineken already owns a 49.99% interest in NBL Investment Holdings, whose market valuation is about R6.9bn (€400m).
At completion, Heineken will contribute these acquired assets plus its 75% directly owned shareholding in Heineken SA and certain other fully owned export operations in Africa, into an unlisted public holding company (referred to as Newco). Heineken will own a minimum of 65% of Newco valued at roughly R43bn (€2.2bn), with the rest held by Distell shareholders who elect to reinvest.
One of these initial steps entails an internal restructuring of Distell to create two separate businesses, one containing the cider, ready-to-drink beverages, and spirits and wine business and the other consisting of Distell’s remaining assets, including its Scotch whisky business to be housed in a Distell subsidiary named Capevin.
As part of the scheme, Distell shareholders will receive simultaneous offers from Heineken and its wholly owned subsidiary Newco, to acquire their Distell shares and also the Capevin shares which Distell shareholders will receive as part of the scheme.
Retail analyst Syd Vianello steered clear of the price when asked to comment but maintains it is a clever transaction that looks set to create long-term value for all the shareholders.
“It’s a great deal for Remgro,” Vianello said. “Swapping a stake in a wine/cider business predominantly in SA for an investment in a huge African business with a huge beer exposure thrown in and with a world-class manager.”
David Holland, director at Fractal Value Advisors, reckoned the market is getting it wrong to focus purely on the price put on the table.
“Distell’s return on capital has been in decline since 2007 and it is now essentially a cost of capital business,” Holland said. “Global peers such as Heineken and Diageo generate much higher real operating returns on capital. Distell is worth much more in Heineken’s hands than if it were left to its own devices as part of the Remgro portfolio.”
The million-dollar question, according to Holland, is how much additional value Heineken can generate from Distell’s assets and operational synergies. Clearly the ability to internationalise Windhoek Lager as a natural beer with no additives, using Heineken’s financial and manufacturing and distribution capabilities, is attractive.
“The higher the premium, the lower the potential net present value [NPV] on the acquisition. The decision to sell Distell is a wise one, and I think the price is a good one for shareholders,” Holland added. “If the deal were to be blocked by the Competition Commission or for some other reason, we would see Distell’s share price fall through the floor. The prepandemic share price of R130 was rather rich for a company struggling to remain above its cost of capital.”
The deal goes to a shareholder vote early in 2022 and will require 75% approval to get over the line, which is not seen as a major hurdle by the market, especially if it is assumed to have the tacit support of the Public Investment Corporation.
“Firstly, Remgro has agreed to vote in favour and to take shares in the unlisted entity,” Vianello said. “Secondly, in my view, this deal would never have been announced unless there was tacit support from the PIC even if not yet in writing. I would go so far as to suggest the PIC would also take shares in the unlisted entity.”
Even for Distell CEO Richard Rushton it is a good deal.
Heineken knows his abilities from his Breweries days, and Vianello speculates that there may well be a plan to get him to play a role in Heineken’s total African beer business where he has superior knowledge.
Asked whether the business would be listed, Vianello said: “I doubt it as Heineken doesn’t have listed subsidiaries anywhere in the world. Eventually the small shareholders will be bought out and I reckon there will ultimately only be three shareholders — Heineken, Remgro and the PIC.”
“Finally, one must start questioning if Heineken’s very rapidly growing Nigerian beer business could eventually fit into the picture as well. They specifically mentioned Nigeria in their recent reports as was SA mentioned for its rapid growth.”
Vianello pointed to beer premiumisation as the growing trend worldwide and Heineken’s brands largely fall into this category.
“And whenever Heineken takes over a business around the world, the new acquisition gets a visit from the controlling shareholder herself, normally together with her husband and/or her children. So as soon as the deal is done, Mrs Charlene Heineken Carvalho will be visiting SA. Maybe she’ll buy a wine farm or two at the same time.”
Heineken Carvalho is a Dutch-British billionaire, and the owner of a 25% controlling interest in Heineken NV. She is the richest person in the Netherlands with a net worth of $16.7bn as of May 2021, according to the Forbes billionaires list.
Minority shareholders have been left a little miffed, though, as Heineken will grab the cumulative cash of two years’ worth of foregone dividends, potentially three if the approvals drag. But if they choose to rather reinvest, they are likely to be in for a profitable ride.
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