Markets & Finance
Diageo loans EABL Sh19.5 billion for subsidiary buy-backSunday November 27 2011
East African Breweries Limited (EABL) has received a Sh19.5 billion loan from majority shareholder, Diageo to finance the re-purchase of its subsidiary, Kenya Breweries (KBL) from international beer maker SABMiller.
EABL said it had received a “dollar equivalent” loan worth Sh19.5 billion that it will use to settle the transaction.
The Kenyan brewer will also dispose of a 20 per cent stake in Tanzania Breweries (TBL) that was previously owned by SABMiller, ending a 10-year shareholding swap deal between the two companies.
“We have secured an inter-company loan from Diageo to fund this, as they have ready access to significant US Dollars,” said Brenda Mbathi, the corporate affairs director at EABL.
The deal was expected to close on Friday, the same day as the share sale of Tanzania Breweries at the Dar es Salaam Stock Exchange.
EABL was expected to raise Sh7 billion from the sale of TBL.
The London based Diageo Group and its associate companies have a 50.03 per cent ownership in EABL.
The beer maker did not reveal the interest cost of the deal, but analysts pointed out that it could be at a concessionary rate-—which would save the company from a local surge in interest rates to an average minimum of 24 per cent.
“An inter-company loan could be better priced than a commercial one. Historically EABL has not sought credit apart from last year when it was financing the Serengeti purchase so this will not weigh heavily on its balance sheet,” said Eric Musau, an analyst at Standard Investment Bank.
The company’s long-term liabilities stood at Sh3.9 billion as at June this year from a nil position in the financial year ending June last year.
Its net profits for the year ended June increased by Sh200 million to Sh9 billion.
EABL had come out last week to quell speculation that it would float a rights issue which had been sparked off by the rise in interest rates, with most banks quoting minimum rates of 24 per cent.
Its share shed Sh10 during last week’s trading at the Nairobi Securities Exchange (NSE) to close the week at Sh161. It was the most traded counter on Friday, accounting for 53 per cent of the day’s traded value.
The financing in dollar denomination however exposes EABL to foreign currency volatility, which has seen some listed companies record reduced earnings.
Conclusion of the two transactions on the same date was meant to annul a marriage of convenience the two brewers entered into about a decade ago that ended fierce rivalry for the regional beer market.
Mr Musau said that SABMiller’s aggressiveness in the Kenyan market after the divorce could be limited by the new packaging rules in the country and the fact that it premier brand, Redds, is already familiar to local consumers.
“Our estimates show that all these efforts are likely to be beneficial to EABL, despite the cost.
In Kenya, the brewer will gain commercial freedoms in operating a wholly owned subsidiary while in Tanzania the company will have a much better chance in managing its destiny,” said Standard Investment Bank in a market report.
EABL last year invested Sh4.9 billion to buy a 51 per cent stake in Serengeti Breweries, a Tanzanian outfit.
In Kenya, SABMiller has already purchased a water bottling plant, Crown foods limited, which
bottles the Keringet brand of water.
It intends to use the company’s distribution channels to sell its imported beer around the country, but is yet to announce plans of setting up a plant.
Apart from the international beer manufacturer SABMiller, EABL has also to contend with competition from local brewer,