SABMiller’s broad-based black economic empowerment (BEE) deal has come under heavy criticism, despite being passed overwhelmingly last week at a general meeting of shareholders in London.
The BEE deal has been criticised for using too high a valuation of SAB SA and it is also seen as a move by the South African brewer to tie in retailers as the local beer giant gets set to face its toughest competition in decades.
In March 2007 Heineken signalled its intention to take on SABMiller on its home turf by winning back its right to brew and distribute Amstel in South Africa, which had previously been held by SABMiller.
This was followed by the announcement that it would be building a new brewery in the Sedibeng district, south of Johannesburg.
The new brewery is the only major non-SABMiller-owned brewery in the country and it has an annual capacity of three million hectolitres.
At the general meeting held last Wednesday, shareholders representing 87% of SABMiller’s issued shares voted on the BEE transaction, with 99,9% voting in favour of the deal.
Shareholder activist Theo Botha, who this week flew to London to raise his concerns at the SABMiller general meeting, says the rationale for the BEE transaction is clearly to tie in staff and retailers as SABMiller gets set to face some stiff competition.
“This transaction could border on anti-competitive activity,” says Botha.
BEE analyst Reg Rumney says SABMiller has always been fiercely competitive, but he is not sure if it would be anti-competitive in a legal sense.
“If the taverners who own SAB shares want SAB to do well, they will ensure they sell more SAB beer than competitors’ beer,” says Rumney. “So they have structured the deal to entrench their market share.
“My sense is that SABMiller is not trying to pull a smart one here, but they are using the deal to fend off inevitable increased competition and to entrench employee loyalty as well as buy some brownie points for broad-based empowerment,” says Rumney.
Absa analyst Chris Gilmour says the deal was very cleverly structured by SABMiller, particularly in terms of bringing the retailers into the fold.
“Perhaps what was upmost in their minds when they structured the deal was to get the retailers on board. If you can get retailers on your side, you can maintain or grow your market share.”
SABMiller spokesperson Nigel Fairbrass says the BEE deal is not anti-competitive. “This is simply not the case. Eligibility in the retailer offer is not based on whether the retailer sells SAB products.
“Liquor retailers that sell none of our products can also participate. The two criteria necessary to participate in the retailer offer are that the liquor retailer be black or majority black owned, and that the retailer be a licence holder or genuine licence applicant.”
Botha argues that SAB SA is in decline, with margins having been squeezed from 25,8% in 2007 to 19,3% in 2009, and with the increase in competition these margins will come under even more strain.
The latest available figures, which are for the period to September 2009, reveal that Brandhouse — the joint venture between Heineken, Diageo and Namibian Breweries — had managed to raise its share of the premium beer segment to 55%. These include brands such as Heineken, Amstel, Windhoek and Guinness.
Heineken’s share of the premium segment was 12,98% at the end of September, up from 8,73% in 2007.
Gilmour says the loss of Amstel has hit SAB SA hard in the premium beer market, which has a nice fat margin compared with the non-premium beer market. But he stressed that we have yet to see the major face-off between Heineken and SAB in South Africa.
Fairbrass says most companies have seen some margin pressure over the past few years following the financial crisis and the resulting global economic downturn.
“However, we remain confident that our unique scale, irreplicable footprint, strong brands and balanced portfolio will allow us to deliver good returns to our shareholders over time,” says Fairbrass.
Botha argues that the valuation of SAB SA for the transaction is too high, arguing that it could be overvalued by as much as 62%, something that SABMiller disputes.
He argues that with SAB SA in decline, this is problematic for the empowerment shareholders.
Gilmour agrees that the valuation may be a bit high. “The valuation is not huge, but it is a bit on the rich side.”
Rumney says: “Almost all BEE deals result in the beneficiaries ending up with not as much as initially appears and sometimes they end up with nothing at all and the loss of the small deposit. That is the extent of their risk.
“This deal is entirely funded by SABMiller, and 60% of the shares are entirely free, so the company bears most of the financial risk. I wonder what it could have done differently?”
SABMiller says that, when constructing the BEE deal, it consulted various advisers on a range of valuation methodologies.
“We feel the approach we now have in place provides a consistent and transparent methodology, which is clearly understandable to all participants,” says Fairbrass.
Another issue that Botha raises is the fact that the employees’ trustees will come on board only after the transaction is signed off and all the documents have been completed.
He argues that this is problematic because the employees’ representatives will have no say in how the deal is structured.
Rumney argues that as the employees are getting shares for free, they don’t have room to complain.
“This is the nature of employee share ownership plans; they have a paternalistic element,” says Rumney.
SABMiller says it consulted with employee representatives and unions when it designed the allocation process for employees.
“Extensive benchmarking was undertaken over a significant period of time to ensure that the offer matched or exceeded other historical broad-based black economic empowerment transactions,” says Fairbrass.