Beer maker East African Breweries Ltd #ticker:EABL is set to significantly raise its stake in its Tanzanian subsidiary Serengeti Breweries by converting a Sh15.3 billion loan into shares.
The Nairobi Securities Exchange-listed firm, which currently holds a 51 per cent interest in the unit, has made the disclosure in its latest annual report.
Serengeti’s market valuation is not disclosed, but the huge equity injection could either suggest a complete takeover or a requirement by the minority shareholders to also inject fresh capital into the business.
The proposed transaction, scheduled to be completed in the current financial year, comes after EABL reached a settlement with Tanzanian authorities over its acquisition of Serengeti in 2010 for Sh4.9 billion.
EABL recently paid an undisclosed fine to Tanzanian regulators who accused the company of not growing Serengeti’s business as per the agreed takeover terms.
“EABL had an outstanding long term investment loan with Serengeti Breweries Limited (SBL) of Sh15.3 billion as at June 30, 2017,” the brewer said in the report.
“As at the date of authorisation of these financial statements, EABL had entered into a commitment to restructure the business of SBL through conversion of this intercompany long term investment loan and interest to equity.”
The proposed transaction is expected to ease the subsidiary’s debt burden while diluting the interests of its minority shareholders –whose equity currently stand at 49 per cent — by a large margin.
EABL paid a Sh2.9 billion premium when it bought the 51 per cent stake in the company, arguing that the amount reflected the anticipated synergies and benefits of acquiring Serengeti’s customers.
The company wrote off Sh285 million of that premium, known as goodwill, in the year ended June in what signals weaker-than-expected performance of the subsidiary.
“During the financial year 2017, management took a more conservative approach and opted to recognize an impairment charge on goodwill of Sh285 million,” EABL said.
The brewer’s sales in Tanzania stood at Sh6.2 billion in the review period, dropping from Sh7.1 billion the year before.
Tanzania’s Fair Competition Commission (FCC) in July 2015 threatened to revoke the Serengeti deal, citing breach of takeover conditions in terms of growing the company’s sales, market share and capital investments.
EABL, controlled by UK’s Diageo, sold its 20 per cent stake in Tanzania Breweries in 2010 and moved to buy a 51 per cent stake in Serengeti.