Diageo delays plan to buy Tanzanian subsidiary of EABL

 

A section of the East African Breweries Ltd plant in Ruaraka, Nairobi. EABL said that Serengeti Breweries sales remained flat at Sh7.1 bn. FILE 

By Neville Otuki, notuki@ke.nationmedia.com

In Summary

• Diageo puts off deal for four years saying Serengeti Breweries Ltd (SBL) is not yet mature.
• The firm had committed in 2010 to buy a 49 per cent stake in SBL for a maximum of 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.

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