Creating a Beverage Champion for Africa
Heineken’ €4 billion offer for Distell and Namibian Breweries Limited (NBL) is a big move into the African alcoholic beverages market. It is a complicated transaction which has yet to face the hurdle of regulatory approval in South Africa but it is a signal that the international brewing giant is taking the sub-Saharan market seriously. At the same time, it illustrates the global complexity of value chains in the beverages industry.
These companies fit together well. The family-owned Heineken is the world’s second largest brewer although it has only a minor portion of the South African beer market (about 12 percent). Distell owns wine, spirits and cider interests while NBL offers a natural beer with no additives (Windhoek Lager) which dominates the Namibian market and has unrealised international potential.
The objective is to bundle most of these assets into a new entity simply called NEWCO at this point. It will exclude some of Distell’s current portfolio, mostly UK-based whisky company Scottish Leader, which will be bundled into Distell’s Capevin. The new entity will be 65 percent owned by Heineken with current Distell shareholders (mostly Remgro and South Africa’s state-owned Pubic Investment Corporation) holding the remainder. While much commentary has focussed on the disappointment of minority shareholders – who had hoped for ZAR200/share but have been offered ZAR180 – what is exciting is less the mechanics of the deal than the international potential it offers.
In the South African market, the new consortium will be well placed to go head-to-head with another giant global brewer, AB InBev, which has owned the current market-dominant company, SABMiller, since 2016. Part of the deal is Heineken’s purchase the half of Namibian Breweries Limited (NBL) that it does not yet own as well as NBL’s 25 percent stake in the Heineken South Africa joint venture.
Heineken is also buying the African infrastructure which Distell has worked hard to establish in recent years. Three years ago, Distell had only 9 000 outlets (taverns, retail stores and restaurants) in Africa outside of South Africa, Namibia, Botswana, Lesotho and eSwatini. In a trading update released in February 2021, Distell announced that it had expanded its footprint to 37 500 bars, taverns, retail stores and restaurants and that it intended pushing towards an eventual total of 250 000. At the end of 2020, the company reported a 20 percent growth in its business in Africa despite the effects of the Covid-19 pandemic.
South Africa’s alcoholic beverage industry is an excellent example of local beneficiation. It adds value to the local fruit crop, especially grapes and apples, and simultaneously enables South Africans to access export earnings. Beer, of course, requires the beneficiation mostly of barley but also hops and other grains. South Africa tends to be a net exporter of barley (depending on the size of the annual harvest), mostly to other African countries but also to the European Union in terms of the SADC partnership agreement. Large parts of the value chain are labour-intensive (especially farming) and the industry has strong multipliers into the tourism, hospitality, transport, packaging and retail industries.
South Africa beneficiates so much of its grape crop that it has to import grape juice to fill supermarket shelves. Much of this has traditionally come from the world’s second largest grape concentrate exporter, Argentina, although this link has been negatively affected by the current turmoil in seaborne logistics. Apples for the beverage market are also embedded in international value chains.
Traditionally, apple-based beverages are made from the portion of the crop that is not ‘cosmetically saleable’ – in other words the fruit that is undersized, sunburned or hail-damaged. Juicing remains a side line for South African apple growers, essentially a contribution to overheads rather than a source of profit. But everyone was taken by surprise when demand for a particular apple-based beverage – Distell’s Savannah brand – soared during South Africa’s Covid-19 State of Disaster.
In its results announcement in October, Distell said that demand for Savannah had doubled over the past year. To meet demand, it was necessary to increase imports of apple concentrate from China, according to industry sources. Cider now accounts for 36 percent of the Distell’s business and the company views Africa as a market with great potential. Distell and Heineken are the world’s biggest and second biggest sellers of cider. The combination of the two should make for a ‘champion’, something much desired by South Africa’s Department of Trade Industry and Competition (DTIC) which espouses similar beneficiation objectives.
There are however regulatory hurdles ahead. South Africa’s Competition Commission and its parent, The Department of Trade, Industry and Competition (DTIC), have complicated several recent transactions. The Competition Act was been amended, in 2018, to allow the regulator to emphasise ‘public interest’ criteria. In practise, these seem to boil down to insisting on a portion of Black South African ownership of the venture. The sale of Burger King to a US private equity firm was blocked in 2021 on the grounds that the deal would dilute Black ownership and went ahead only after the buyer had promised to sell a local meat supplier to a Black owner.
On the other hand, Pepsico’s US$1.7 bn purchase of local food and drinks producer Pioneer Foods in 2020 appeared to be a smooth process with the US-based firm pre-empting Black ownership requirements by offering employees and Black South African owners shares worth US$106 million on the Nasdaq. The Heineken deal is attempting to pre-emptively finesse the issue by announcing that the new entity will ‘enhance the enlarged business’ empowerment ownership post completion of the Transaction.’ Whether this will be enough to appease the competition regulators is an open question.
The deal’s optics are not improved by the fact that it involves delisting Distell from the Johannesburg Stock Exchange and putting it in private hands. That is the way Heineken works in all its operations around the world. Some observers suggest that family ownership relieves the company of the pressure to report earnings to the market every three months and makes it more prone to take on the sometimes onerous task of developing local suppliers where it operates. Heineken claims that sources half the raw materials used in its existing African operations from ‘local small scale farmers‘.
This looks like a good deal for Africa. It promises to expand linkages between South Africa and other African countries, find new international markets for locally beneficiated products and, in so doing, generate employment. The question is whether South Africa’s regulators will let it go ahead.
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