Previously, I highlighted that Distell Group was on a winning wicket coming out of this pandemic.
Subsequently, Distell broke the news that Heineken had approached the group regarding the acquisition of the majority of Distell’s business.
For the purposes of this article, let us ignore the fact that Heineken may only be after the group’s cider business and this deal may happen at subsidiary level. Let us assume that Remgro – as kingmaker in this deal – will be pushing for an entire takeover at group level on a cash deal (as this will probably be in their interests seeing as they are trying to unlock value in their net asset value).
Assuming we are correct, what price might Heineken take Distell over at?
Firstly, let us consider the world’s various listed alcoholic beverage groups below. Ignoring nuances, the more profitable each group has (consistently) been, the higher its market multiple on its Ebitda (earnings before interest, tax, depreciation and amortisation) is, as shown by the black, dotted linear regression line in the following chart.
Interestingly, Distell’s average return on equity (ROE) has been similar to Heineken NV’s and, based on historical Ebitda, the market has rewarded it with a similar rating. Except that Distell’s major market effectively banned its business for a good chunk of the current trading period.
Hence, the key distinction starts to appear as you look forward.
Distell’s share price is trading at nearly a 25-33% discount based on its forward Ebitda relative to Heineken’s equivalent measure.
Why is this important?
Well, if Heineken wants this deal to be accretive, the natural ceiling on the multiples paid for Distell will be Heineken’s own market multiples (relative to its own returns on equity).
Hence, let us apply Heineken’s own forward multiples to Distell consensus outlook.
Relative value working
|(1) Market cap||R37.8bn|
|(2) Net debt||R2.7bn|
|(1 + 2 = 3) Enterprise value (EV)||R40.5bn|
|Distell forward June 2021 forecast|
|(4) Heineken 12m forward EV/Ebitda||13.9 x|
|(3 x 4 =) Fair value|
|Distell Group’s fair value (Rbn)||R44.6bn|
|DGH’s share’s fair value (cps)||20 016cps|
Source: Refinitiv, broker consensus and author’s own workings and assumptions
What is important to note in this simplistic approach is three things:
- This is based on current estimates that involve forecast risk;
- This assumes no synergies from Heineken’s side (which is unrealistic and would bolster the valuation upwards); and
- This is a minority valuation and does not assume any control premium (which is unrealistic and would bolster the valuation upwards).
We note (1) above, but (2) and (3) both indicate upside against this valuation. Therefore, throwing a 10-30% control premium with a 5-10% synergy uplift, we arrive at a ‘takeover range’ for the entire Distell that Heineken may find acceptable – around 23 000 cents per share (cps) to 28 000cps (i.e. fair value with a 15% to 40% premium range).
My personal guess would be closer to 24 000cps, which compares very favourably against Dsitell’s current 16 930cps share price.
While academically interesting, large deals like this take time, involve lots of risk and can fail to reach conclusion. This deal is far from done and it may still never see the light of day, irrespective of the math and statistics shown here.
Keith McLachlan – investment officer at Integral Asset Management.
McLachlan holds Distell Group shares.