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Why EABL has cut back Sh15bn Serengeti stake

EABL Group Managing Director Andrew Cowan
EABL Group Managing Director Andrew Cowan. FILE PHOTO | NMG 

Beer maker East African Breweries Limited (EABL) #ticker:EABL has written off a Sh15.3 billion loan advanced to Serengeti Breweries Limited in what appears to have been prompted by a hard tackle from Tanzanian authorities of the change in the firm’s ownership that was first revealed in the company’s annual report.

EABL last Friday published a notice in local newspapers indicating that its ownership in Serengeti had gone back to 51 percent despite the debt-to-equity transaction it said had raised the stake to 72.5 percent, indicating that the amount has been written off.

EABL had indicated that it would gradually bring down its stake in Serengeti by retaining 50 per cent of dividends payable to its partners whenever such payouts are made.

There is no indication that the giant brewer has paid any dividends since publication of the financial report for the year ended June 2018 – meaning only a write-off could return its shareholding in Serengeti to the 51 percent announced last Friday.

“EABL confirms that there have been no changes to its shareholding in SBL, which remains at 51 per cent as at to date,” the brewer said in the notice and in total contradiction to disclosures it made on the transaction in the annual report.

At Sh15.3 billion, the Serengeti write-off is more than twice the brewer’s net profit of Sh7.2 billion in the year ended June, revealing its possible impact on the company’s plight.

The Nairobi Securities Exchange-listed firm disclosed in its latest annual report that its interest in Serengeti rose from the previous 51 per cent to 72.5 per cent as of June after the loan was converted to equity.

EABL did not indicate whether the transaction was reversed by Tanzanian authorities and neither did it elaborate on the status of the loan.

The brewer had disclosed in its annual report that it had struck a deal with non-controlling shareholders in Serengeti to convert its outstanding loans into equity without proportionate capital contribution by the non-controlling shareholders. “The transaction resulted in an increase in the effective control of the subsidiary from 51 per cent to 72.5 per cent.”

EABL had an alternative means of restoring its original stake but it could not have been implemented in the short period of about four months.

Serengeti’s minority shareholders, who were diluted down to 27.5 per cent from 49 per cent in the transaction, were given an option to build back their equity by ceding half of their dividend entitlement.

To pull this off, Serengeti would have needed to generate a net profit of about Sh55.6 billion, out of which the non-controlling shareholders would have given up their share of Sh15.3 billion to reverse their dilution.

The loss-making subsidiary is far from reaching these numbers, which represent more than seven times what its parent company EABL earns in a year.

EABL says in the annual report that the Sh15.3 billion loan included a Sh4.2 billion portion that had already been written off.

The debt-to-equity conversion was made to ease the subsidiary’s debt burden. EABL’s about-face could have been prompted by Tanzanian authorities who previously opposed its acquisition of Serengeti and forced it to pay an unspecified fine to settle alleged flouting of takeover rules.

Tanzania’s Fair Competition Commission (FCC) had 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 bought its initial 51 per cent stake in Serengeti for Sh4.9 billion.

The amount included a Sh2.9 billion premium that the brewer said reflected the anticipated synergies and benefits of acquiring Serengeti’s customers.

EABL has written off Sh285 million of that premium, known as goodwill, in a signal of weaker-than-expected performance of the subsidiary.

The brewer’s sales in Tanzania stood at Sh8.1 billion in the year ended June, up 14.2 per cent from Sh7.1 billion a year earlier. This represented 11 per cent of the brewer’s total sales of Sh73.4 billion. EABL did not disclose whether or not Serengeti is profitable.

Serengeti had net assets of Sh8.6 billion as of June, valuing the 27.5 per cent stake of the company’s minority shareholders at Sh2.3 billion.

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