After years of speculation of a possible deal between the world’s second largest beer group Heineken and South Africa’s wine and spirits maker Distell, on Tuesday morning the two groups finally announced they had entered into discussions.
The news prompted a short-lived spike in the Distell share price to a high of R158 but within minutes the price had eased back to R150.
Local fund managers and shareholders are adamant that Heineken will have to offer a significantly higher valuation if it hopes to do a deal.
“Similar drinks companies across the globe enjoy much higher price ratings than Distell,” one fund manager told Moneyweb. However a Europe-based analyst responded that “similar drinks companies” are better managed and have brands with international clout.
A deal with Heineken, which is the number one cider producer in the world, could raise competition concerns given the prominence of ciders in Distell’s portfolio.
Distell’s powerful performance in the cider market with brands such as Savannah and Hunters has propelled it to the world’s number two slot in this category.
However this means that unless the merging parties are able to persuade the local competition authorities that it should focus on alcoholic beverages – where AB InBev dominates – rather than individual categories, the merged entity might be required to offload one of Distell’s most attractive businesses.
The merging parties will be keen to avoid this particularly as there are few obvious buyers.
Vivian Imerman’s Vasari Beverages looks like one of the very few possible buyers. In 2016 Vasari acquired the operational assets of KWV, one of the oldest spirits and wine producers in South Africa.
This would not be the first time the competition authorities have played a role in Distell’s life.
In 2016 the Competition Commission stated that one of the conditions before it would approve the acquisition of SABMiller by AB InBev, the world’s largest beer group, was the sale by SABMiller of its 27% stake in Distell. SABMiller sold the stake to the Public Investment Corporation (PIC) for a speculated R170 a share. That SABMiller had a significant stake in a non-beer drinks group was itself the result of demands made by the competition authorities several decades earlier.
In recent years expectations of an offer from Heineken have helped to support the Distell share price.
But these expectations could not protect the share from touching six-year lows in the early months of the Covid lockdown in 2020.
Last year the Distell board, led by chair Jannie Durand of Remgro, assured long-suffering shareholders that years spent investing in acquisitions, enhancing production capacity and beefing up its sales force would soon pay off.
The group has invested heavily in boosting its African footprint and earlier this year informed shareholders that its products are now being sold in 37 500 outlets in Africa, outside SA, Lesotho, Namibia, Botswana and Eswatini – up from 9 000 two years ago. It is planning to grow its footprint to 250 000 outlets within five years.
For Heineken, which has struggled to make inroads into the dominant market position enjoyed by AB InBev-controlled SAB, the acquisition of Distell could help it carve out a stronger position in the African drinks market.