EABL Sh19.5 billion loan takes biggest finance deal of 2011

The Sh19.5 billion loan by international brewer, Diageo, to its local subsidiary, EABL, will go down as Kenya’s biggest corporate financing deal in 2011.

Details of the deal are expected to show in full in EABL’s financial statements for 2012, and will inevitably be a key driver of the share price of NSE’s most valuable firm in the year ahead.

The loan helped EABL to finance the buyback of a 20 per cent stake in Kenya Breweries, the group’s most valuable subsidiary that had been sold to global beer producer, SABMiller, nearly a decade ago. “The biggest concern I would have as an investor in EABL is the level of exposure to foreign exchange fluctuations that the loan brings because the amount is significant,” said Eric Musau, a research analyst at the Standard Investment Bank (SIB) while commenting on the impact that the debt is likely to have on EABL’s share price.

There is also a chance that EABL shareholders will get a lower dividend payout over the term of the loan as funds are diverted to service the loan, although extra revenues from full ownership of KBL could offset any such cutback

A high volatility of the shilling, as was the case in 2011, could make EABL’s re-payments more expensive.

The second half of this year has particularly been unpredictable for Kenyan firms as the local currency depreciated rapidly to touch an historical low of 107 units to the dollar in October, more than 25 per cent lower over the same time last year.

Though the shilling looks set to close the year in the 82 units range, firms with huge forex exposure such as East African Portland Cement have suffered exchange losses, as their outstanding loans have exceeded the principal amount even after re-paying it for a decade. Vimal Parmar, the head of research at Kestrel Capital, however, expects that the loan will be structured in a way that EABL is cushioned regardless of the swings in the currency rates.

“Though we do not know the fine details of the transaction, Diageo has a huge interest in EABL and the deal must therefore have been structured to be beneficial to both parties in any eventuality,” said Mr Parmar.

“It is very likely too that EABL, being a blue chip company, must have taken measures to cushion itself against adverse effects of exchange rate swings,” he added. EABL has consistently maintained a high dividend payout, paying Sh8.75 in the last financial year in a period when it booked Sh9.30 earnings per share.

SIB predicts that repayment of the loan is likely to erode the firm’s ability to maintain a 95 per cent dividend payout policy, projecting that it could fall to 80 per cent in the medium term, prior to information on the loan deal coming through.

UK based Diageo owns 50.3 per cent in EABL, which underscores its interest in the performance of the NSE-listed firm with a market capitalization of about Sh135 billion, and the resultant gains in buying back the KBL stake held by SABMiller.

EABL also disposed of a 20 per cent stake in Tanzania Breweries through the Dar Stock Exchange- in a transaction that was expected to raise about Sh7 billion.

Conclusion of the two transactions formally annuls the marriage of convenience the two brewers entered into about a decade ago to ended fierce rivalry for the regional beer market, meaning that each of them would now push its own products in both Kenya and Tanzania.

The entry of SAB Miller into the Kenyan beer market- through the acquisition of Crown Beverages may be significant for EABL because it poses direct competition to its market leadership despite traditionally retaining a tight control.

Mr Parmar said EABL’s market share in Kenya does not face any serious threat in the short term because of already string customer loyalty for its products.

SABMiller will gain a free hand in operating Crown Beverages, while it would have a better chance to manage its strategy in Tanzania through its controlling stake in TBL.

Mr Musau expects heightened competition in the regional beer market, especially with the entry recent entry of Heineken, which has announced plan to set up a regional office in Nairobi.

Disposal of the TBL stake also allows EABL to focus on its Tanzanian subsidiary, where it owns a 51 per cent stake.
EABL’s share closed at Sh171 on Friday last week.