EABL to pay SABMiller Sh20bn for subsidiary

East African Breweries employees work at a newly commissioned bottling plant last year. EABL is set to buy back 20 per cent of a stake owned by rival Tanzania Breweries Ltd (TBL) in its main Kenya Breweries subsidiary.  Fredrick Onyango
East African Breweries employees work at a newly commissioned bottling plant last year. EABL is set to buy back 20 per cent of a stake owned by rival Tanzania Breweries Ltd (TBL) in its main Kenya Breweries subsidiary. Fredrick Onyango 

The stage is set for the first major competition in the Kenyan beer market in almost 10 years after two rival London Stock Exchange firms neared completion of transactions aimed at separating their businesses in Kenya and Tanzania.

Under the deal, East African Breweries Ltd (EABL) — 50 cent owned by Diageo — is set to buy back a 20 per cent stake owned by rival Tanzania Breweries Ltd (TBL) in its main subsidiary, Kenya Breweries, for nearly Sh19.5 billion.

Public sale

In exchange, the 20 per cent of SABMiller dominated TBL owned by the Nairobi-headquartered firm will be put on public sale, EABL said in a statement filed with the Nairobi Stock Exchange on Friday.

The firm on Monday confirmed this would take place at the Dar-es-Salaam Stock Exchange, one of the three bourses where EABL is listed. The Kenya market has been dominated by EABL since the exit of SABMiller in May 2002.

“Given our announcement about the termination of KBL’s brewing and distribution agreement with SABMiller, we expect that SABMiller will shortly become a fourth key competitor in Kenya,” EABL’s corporate relations director Brenda Mbathi told the Business Daily on Monday. Keroche Breweries and Sierra are the other breweries seeking to wrestle the stronghold Kenya Breweries has in the beer market.

Ms Mbathi’s view was shared by other market observers. “We could see SABMiller transport products from their Arusha plant to Kenya as there is a very good road link—even before they set up a plant in Kenya,” said a source familiar with the industry, who can’t be named without compromising his interests.

EABL says it will shortly stop distributing and brewing TBL products — Castle and Redds brands — after KBL decided to terminate the agreement.

A similar deal in Tanzania was rendered useless after EABL in July 2009 courted and eventually acquired a majority stake in Serengeti Breweries Ltd in Tanzania for $60.4 million. The Serengeti affair led to a bitter fall-out between the LSE firms and arbitration and litigation actions in London.

Finalisation of the equity settlements will bring to a close nine years of an anti-competitive marriage of convenience between the parent firms.
The truce saw EABL close Kibo Breweries in Moshi, Tanzania, while SAB shut down its Castle Brewing plant in Thika, Kenya. The latter’s closure in May 2002, two weeks ahead of the Budget where it had wrongly been made to believe barley imports, locally dominated by EABL, would be zero-rated led to a loss of 800 direct jobs and ended serious beer industry competition.

However, in the last two years Keroche Breweries has attempted to dislodge EABL , but is badly hampered by its capacity and, only a week ago, had rendered EABL a virtual monopoly as it reportedly serviced its boilers. Sierra, another brewer, has a limited reach.

SABMiller last year took over Keringet, an up-market water bottler, but are yet to signal any major re-entry into the beer industry which may entail a green field investment.

On the face of it, the transactions could allow EABL to reclaim a good share of the Tanzanian market which may have better prospects than the Kenyan market already facing hard times from the Alcoholic Drinks Control Act. EABL went up 14 per cent in the past half year but the profit after tax contracted two per cent in Kenya.

EABL is expected to claim a huge chunk of the Tanzanian market after snapping up Serengeti, with a 17 per cent share of the market, besides Tusker, Malta Guinness and Guinness brands hogging about 12 per cent.

The SABMiller products in Kenya hold an insignificant stake in the market and it remains to be seen what EABL fetches in exchange for the nearly Sh20 billion payout.

Tanzania, under EABL segmental reporting for 2010, is recorded as contributing Sh722.2 million to EABL as compared to Sh34.5 billion for Kenya (where KBL contributes most of the profit) and Sh7.2 billion for Uganda.

“The deal appears beneficial to the EABL group but the concern is about how they are going to finance the buying of the shares,” said Mr Eric Musau, an analyst at investment banker African Alliance, pointing out that the full details were not yet out.

The options for financing may range from debt, partial finance from reserves or shareholder loans, he said.

EABL has over Sh10 billion in retained earnings. “They would have to look for over Sh10 billion to finance the deal,” said Mr Musau. The stock lost a Shilling to trade at Sh213 yesterday as the market tried to digest the news.