Diageo delays plan to buy Tanzanian subsidiary of EABL

UK brewing giant Diageo has delayed the purchase of East African Breweries Limited’s Tanzania subsidiary for four years.

Diageo, which owns 50.02 per cent in EABL, had committed in 2010 to buy a 49 per cent stake in Serengeti Breweries Limited (SBL) between this month and July for a maximum of $600 million (Sh51.6 billion) based on the performance of the Tanzania unit.

Now the UK firm says it will exercise the option in 2018, arguing that SBL is not yet mature due to the heavy investments being made by its shareholders including EABL, which owns a 51 per cent stake in the firm.

“The option for Diageo to acquire the remaining stake in Serengeti Breweries Limited has been extended to 2018 by mutual agreement between Diageo and SBL’s other principal shareholders,” said Diageo in an e-mail response to the Business Daily.

“EABL has invested considerably in bolstering its brands, securing distribution and establishing a solid platform from which to grow its beer and spirits business in this attractive market. As this continues to be an investment period, it was appropriate that the option be extended,” added the UK firm.

The cost of buying the 51 per cent stake is based on the profitability of SBL in the year preceding the completion of the deal.

Analysts reckon that Diageo’s purchase price could have been far much lower than the maximum targeted buyout price of Sh51.6 billion had it bought the 49 per cent stake this month given that the Tanzanian brewer was yet to break even.

EABL bought 51 per cent of SBL in 2010 at a cost of Sh4.8 billion.

“There could have been a number of reasons behind the delay, but the investors being bought out could have been disadvantaged given that the buyout price was based on a profit multiple,” said Mr Eric Musau, an analyst at Standard Investment Bank.

EABL said that Serengeti sales remained flat at Sh7.1 billion in the year to June while Diego noted that it posted an operating loss of £2 million (Sh280 million) in the same period.

The 49 per cent stake could have given Diageo a 74.5 per cent interest in SBL given that it owns half of EABL. This will give it a controlling stake.

The stake is held by three institutional investors including Union Brewery, Napster and CMG investments that have a combined ownership of 44 per cent. 

Interest in Serengeti

EABL director and Tanzania’s first indigenous Attorney General Mark Bomani owns three per cent of SBL, while Henry Mosha owns the remaining two per cent.

Diageo’s plan to acquire SBL comes as the multinational increasingly eyes new deals in the region. In 2011 the firm made a direct bid for a state-owned brewer in Ethiopia, dashing EABL’s hopes of entering the market.

Diageo took part in a public auction of the Ethiopian brewer, Meta Abo, as the global brewer targeted rising incomes in Africa’s emerging markets and a larger stake of the region.

EABL’s interest in Serengeti came after the Kenya based brewer ended its east Africa partnership with London-listed SAB Miller. Under the pact, EABL was to focus on the Kenyan market and offer SAB Miller a 20 per cent stake of its local business.

The London-listed firm also offered EABL a 20 per cent stake in Tanzania Breweries in an arrangement aimed at avoiding vicious market share fights in the two markets. But EABL ended the partnership and opted to buy SBL.

The Nairobi bourse listed firm spent Sh20.6 billion to buy back the 20 per cent stake it offered SAB Miller in Kenya Breweries and sold the Tanzanian stake for Sh3.6 billion.

EABL turned to debt to complete the share transactions. This has left it with huge a financing cost that cut the brewer’s net profit 37.9 per cent to Sh6.9 billion in the year ended June.

Its dividend pay dropped to Sh5.5 per share from Sh8.75 in the review period.