British multinational Diageo Plc’s proposed purchase of extra shares in EABL is driven by the listed brewer’s improved returns to investors and a desire to raise its holdings in the company to match the level it owns in other African subsidiaries.
EABL remains one of the most efficient firms in generating returns on shareholder funds at the Nairobi Securities Exchange (NSE), owing to its maturity in terms of capital investments and a large market share in the beer industry.
The firm recorded a sharp recovery in profitability in the year ended June, more than doubling its net earnings to Sh15.57 billion from Sh6.96 billion a year earlier. This saw its return on equity —a ratio that gauges how efficiently a company generates profits— jump to 58.9 percent from 46.9 percent.
The earnings surge saw the brewer overtake Safaricom whose ratio stood at 48.4 percent in the year ended March. The higher a company’s ROE, the better it is at using shareholder funds to make profits.
Diageo also noted in the share purchase disclosure that it expects the new investment to raise its ownership profile to match that of other multinationals holding majority stakes in NSE-listed firms. Currently, the company owns 50.03 percent of EABL through a wholly owned subsidiary known as Diageo Kenya, equivalent to 395.6 million shares, which it hopes to raise to 65 percent by purchasing an additional 118.39 million shares at a price of Sh192 each.
Diageo Kenya will, therefore, pay Sh22.7 billion for the additional stake, whose purchase it expects to conduct in two phases between January 30, 2023, and February 7, 2023, and February 20 and March 10, 2023.
“Diageo’s East African business continues to go from strength to strength and is expanding its reach at pace. In addition, a resilient and adaptive approach by the business through the Covid-19 pandemic combined with vibrant e-commerce growth has cemented Diageo’s belief that this is an appropriate time to deepen its East African position,” said Diageo last week.
“Furthermore, Diageo’s indirect shareholding in EABL of 50.03 percent is lower than the average shareholding of approximately 66.9 percent held by multinational parent companies in listed subsidiaries in Kenya. It is also lower than the average shareholding for other listed subsidiaries of Diageo in Africa such as in Guinness Nigeria and Guinness Ghana Breweries where Diageo holds a 58.02 and 80.4 percent stake respectively.”
EABL has also been one of the higher dividend payers at the NSE, owing to the limited reinvestment it has needed to make in its business locally. In the year to June, the company paid a dividend of Sh11 per share, equating to a total payout of Sh8.7 billion.
The firm’s recent capital expenditure has also been geared towards cost cutting, pointing to future headroom in profitability for investors.
EABL, for instance, plans to stop using Kenya Power electricity to drive its Kenyan factories by 2030, under a Sh22 billion plan to utilise solar power in its operations.
Under the plan, the company targets to generate at least 9.3 megawatts at its Ruaraka plant and 2.4-megawatts from solar power in Kisumu.