Glass wine bottles on display. South Africa’s Distell wants to sever links with Kenya Wine Agencies Limited on grounds of continued delay of a privatisation process it claims is frustrating its strategic plans. Photo/REUTERS
State-owned alcoholic drinks maker Kenya Wine Agencies Limited has been drawn into a battle for survival after its partner issued a notice of intention to terminate a 14-year old contract for the distribution of flagship brands, which account for up to 60 per cent of its revenues.
South Africa’s Distell wants to sever links with the Kenyan firm on grounds of continued delay of a privatisation process it claims is frustrating its strategic plans.
Distell is the owner of flagship Viceroy and Amarula brands, which are exclusively distributed by Kenya Wine Agencies Limited (KWAL) and has more recently been pushing for a stake in the Kenyan company.
The South African company threw KWAL into a crisis with the issuance of a notice in June of intention to terminate the distribution contract it signed with the Kenyan firm in 1998.
Distell says its patience has been stretched to the limit by the Kenya government’s continued delay of KWAL’s privatisation that was to give it an ownership stake in the firm.
The Treasury has maintained that the absence of a board at the Privatisation Commission has made it impossible to start the process of selling part of the government’s 73.57 per cent stake in the alcoholic drinks firm, pleading with the South Africans for patience.
The Treasury last month published the names of people it wants appointed to serve in the commission’s board, but Parliament is yet to vet and approve the candidates.
KWAL is the sole marketer of up to 80 of Distell’s brands in Kenya that account of 60 per cent of its profits and analysts say the exit of the South African firm would leave the Kenyan company a near shell that will be almost impossible to find a buyer for.
Under the partnership agreement signed with Distell, each partner is bound to give a three-month termination notice – and is what the South African firm did in May signalling its intention to sever links with the Kenyan firm in August.
But KWAL has responded to the notice with a double-pronged strategy aimed at delaying Distell’s exit while it pushes the government to speed up its privatisation.
KWAL went to court last Friday and obtained an injunction restraining Distell from terminating the contract until the dispute between them is heard and determined.
The Kenyan firm had on Friday published a notice in the local press indicating that it wanted the dispute resolved through arbitration.
That move appears not to have borne fruit, forcing it to move to court for an injunction as the August 1 date drew closer.
Court documents filed by KWAL indicate that the Kenyan firm is reluctant to let go of the partnership with the South Africans, arguing that it had heavily invested in the success of Distell’s brands, giving it a claim on the long-term dividends.
The same documents, however, reveal of a loose marriage of convenience where either party is allowed to walk out by giving a three-month notice that culminates to the actual termination of the contract next October 1, the anniversary of the deal entered in 1998.
“The plaintiff is in the process of initiating arbitral proceedings, pursuant to an arbitration clause agreed by the parties to the said agreement,” KWAL says in papers filed in the High Court.
Distell, through its local subsidiary Distell Winemasters, has expressed the intention of taking over distribution of the alcoholic beverage brands it has been selling in Kenya through KWAL.
KWAL’s range of products include the Yatta wines and fresh juices, Kibao Vodka and Simba Cane - both hard drinks targeting the low income segment of the market.
Own products account for only 40 per cent of KWAL’s profits, indicating that the exit of Distell from its stable would leave the company heavily exposed.
Listed investment firm Centum, which has a 26.43 per cent stake in KWAL, has warned its shareholders that cancellation of the Distell contract would greatly impact on KWAL’s profitability moving forward.
Friday’s court orders have left Distell’s exit hanging in the balance, but it is becoming clear that the Kenyan government may not have foreseen the challenges KWAL would face in the event that the South African beverage maker quit.
Edwin Kinyua, the managing director at KWAL, insists that Distell’s exit would cause his firm irreparable damage that could possibly never be compensated.
“Unless the court intervenes and grants the orders sought, the plaintiff is at risk of suffering irreparable damage that cannot be compensated whatsoever,” said Mr Kinyua in a statement to the High Court.
Mr Kinyua says in his statement as a witness in the suit that the Kenya government has promised Distell a 26 per cent stake in KWAL in exchange for the continuation of the rights to distribution.
It was, however, not possible to independently confirm how far the said negotiations have gone or if Distell has agreed to a contract-for-a stake swap with the Kenyan government.
The transfer of the stake to Distell was part of a wider plan by the government to privatise KWAL through the sale of a 30 per cent stake to the public. Mr Kinyua insists that the process began with the Cabinet’s approval of the deal late last year.
But Solomon Kitungu, the chief executive at the Privatisation Commission told the Business Daily that the sale of KWAL along with other State-owned assets was being delayed by Parliament’s failure to appoint commissioners.
Distell’s intention to cancel the deal essentially places the Kenyan government in a difficult position. KWAL has been lined as one of the key assets that the government wants to sell in the current financial year but its value is greatly pegged on the contract with the South African beverage maker.
It is not clear however if Distell had agreed to the government’s proposal but Mr Kinyua claimed that the negotiations have been ongoing since 2010 and are currently at an advanced stage.
The uneasy relationship between the two firms began in June when Distell made known its intention to terminate the 14-year old contract beginning August 1, 2012.
KWAL claims that Distell, whose brands are now household names in Kenya, ignored the terms of the contract entered between the parties which demands a 3-month notice of intent to exit and the provision that the deal could only be terminated on October 1. Through the share-for-rights swap, Distell was expected to cease earning fees and commissions on its brands sold by KWAL and gain from a share of the company’s profits paid as dividend. Distell has since followed up the notice with the establishment of a local subsidiary Distell Winemasters to manufacture and distribute its products in Kenya.
The KWAL-Distell standoff is a re-enactment of another deal between a South African brewer and a Nairobi-based beer maker that eventually led to a severing of links early this year after several months of arbitration and a Sh20 billion payout.
SABMiller and East Africa Breweries Limited fought a fierce legal tussle spanning several months after the South African firm claimed that its Kenyan counterpart was flouting terms of a distribution contract entered in 2002.
EABL was to distribute SABMiller’s products in Kenya including Redds and Castle Lager in exchange for SABMiller’s marketing of its beers in the Tanzanian market - where the South African firm had a big interest.
The two companies had a share swap equivalent of 20 per cent stake in each partner to cement the marriage.
SABMiller has since entered the Kenyan market through the acquisition of Crown Beverage, a local company that also bottles and markets water.
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