Global asset manager Ninety One, the SA-born global asset manager with around R3 trillion in assets under management, announced on Monday that it will vote against the proposed transaction that will result in Heineken acquiring the majority shareholding in Distell Group and see it delisting from the JSE.
Shareholders will attend a virtual meeting on Tuesday morning to vote on the proposal.
“Distell is a unique JSE-listed asset. Whilst the latest Vawter Cucumber Hard Seltzer may not tickle your taste buds, the chances are good that you have enjoyed some of their iconic brands if you choose to imbibe,” says Rob Forsyth, investment specialist at Ninety One, adding that Distell is currently well placed to capitalise on several developing global trends.
Forsyth says Distell ticks all the boxes of converging trends:
- Beer is losing share to alternative beverages, spirits and wine;
- Globally, cider is growing and has strong appeal across genders;
- Local production flexibility on an economic scale; and
- Distell can make excellent returns from beverages in Africa.
“Unfortunately the ‘tock’ is that Heineken plans to unceremoniously snaffle this asset and seize the majority of this high-quality liquid investment opportunity,” says Forsyth.
Ninety One indicates that local investors will miss out on the opportunities when Distell delists, as many institutional investors would not be able to hold unlisted Distell shares.
Many institutions have a mandate that prohibits investing in unlisted shares. It is not popular with private investors either, due to pricing and trading concerns.
The total offer comes to R180 per Distell share, representing a premium of 53% to the average weighted share price during the three months preceding the date of the first cautionary announcement from Distell.
While the R180 per share values Distell at more than R40 billion, Forsyth says it is too low.
“The cash offer is not appealing. The R180 per share is at a steep discount to other listed global beverage companies.
“The peer group is diverse, but the median-listed price-to-earnings [PE] multiple [to June] of the global peer group is a fraction under 25 times. At R180, Distell is arguably in a PE range of 18 to 20 times.
“Benchmarking all global beverage transactions over the last decade would also result in a range of valuations from R230 to R250 per Distell share,” he says.
In fact, Distell traded at around R190 at the end of September 2021 following a very strong recovery from the Covid-19 market crash in March 2020 when it reached a low of only R66.
Forsyth also notes that Distell has not paid dividends for two years, while the latest trading update indicates a very strong balance sheet.
Without saying it, one gets the idea that Heineken is due to ‘score’ the saved up dividends to the disadvantage of existing shareholders.
Forsyth’s most important point is that Heineken is actually an inferior business compared to Distell. He says Heineken will end up with 65% of the shareholding in the new unlisted entity, while contributing only around 35% of gross revenue.
“The Heineken business operates at inferior levels of profitability to Distell. Heineken will contribute less, hold more, and then benefit from the outlined R1.5 billion in cost savings.
“That hardly seems fair,” says Forsyth.
The proposed scheme of arrangement involves a few interrelated transactions, according to the formal documents issued a few weeks ago.
Distell will split into two separate businesses. A new company, Newco, will be formed to house Distell’s big portfolio of best-selling local brandy and whisky, as well as its cider brands, other ready-to-drink beverages and its big range of wine.
Heineken is offering shareholders R165 per share for their interests in this business.
The second entity, Capevin, will house Distell’s imported whiskies. The shares in this entity will be distributed to Distell shareholders in the ratio of one Capevin share for every Distell share. Heineken is offering R15 per Capevin share.
At the time of the announcement, Distell said that neither of the two companies will be listed on the JSE, leaving shareholders with the option of taking the cash or sitting with unlisted shares after the scheme of arrangement.
Forsyth says Distell puts forward an argument that investors can choose to keep their shares in the unlisted entities. “Well, the unlisted structure benefits significant shareholders, particularly Heineken, at the expense of the remaining shareholders, notably the average pension fund or unit trust holder.
“If you opt for the unlisted shares, you would need permission to sell your shares in Newco and Heineken retains significant shareholder rights in Capevin, even if they hold only one share.
“Not only is there no control premium, but any shareholder should also immediately mark down their value in line with lower liquidity and reduced rights,” says Forsyth.
He says local shareholders have a fair bit of experience losing beverage assets from the JSE.
“We have lost such unique diversifying growth assets before. Think Cadbury Schweppes, Suncrush, ABI and SABMiller [to AB InBev].
“At least, in the latter transaction, shareholders had the option of remaining invested in a listed entity. We have not been given this option with Distell,” says Forsyth.
“We find the absence of protection for long-standing pension savings startling. The price is too low. The new structure makes it difficult for the average pension fund or unit trust to remain invested. Accordingly, we will be voting against the scheme on behalf of our investors,” he says.
Unfortunately, Ninety One’s stand will not make a difference.
Remgro will be able to vote its shares and has given an irrevocable undertaking to vote in favour of the proposal. That means that 53% of the vote is in the pocket.
Remgro assured shareholders that it will take up shares in Newco in exchange for its Distell shares, and will become a minority shareholder in the bigger company. Remgro will remain the controlling shareholder of Capevin.
Investors can get (limited) exposure to the Distell businesses by investing in Remgro, but this will be diluted by all the other interests in the group.
The next step after the meeting is to give shareholders that voted against the scheme time to approach the courts, if they wish. Thereafter, the SA and Namibian competition authorities must approve the transaction, estimated to be done by June 30.
Sadly, Distell is likely to disappear from the JSE on September 5.