Heineken buying Distell will allow for its diversification in the wake of waning beer sales

Savanna drinkers found themselves parched after the popular beverage recently went out of stock nationwide. If this did not give Heineken motivation to acquire Savanna’s parent company, Distell, then nothing else would. 

The Dutch international beer giant recently announced a R38.5-billion offer to acquire Distell six months after first announcing interest in the owner of such brands as JC le Roux, Klipdrift, Amarula, Savanna and Hunters Dry, which has a market capitalisation of R37.24-billion. 

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South Africa has a vibrant alcohol market and international players have been vying for a piece of the pie for years. 

According to data analysis platform World Population Review’s 2021 survey on alcohol consumption, South African men drink, on average, 15.74 litres of alcohol a year, and women average 3.46 litres. The national average is 9.45 litres. 

Heineken’s purchase of Distell means the predominantly beer-producing behemoth will add wine, brandy and whisky to its catalogue and increase its reach and presence in the local liquor market. 

Heineken already has ciders in its catalogue, the most well-known in South Africa being Strongbow. With the purchase of Distell, it will expand this part of its business. 

From the transaction Heineken will get a little bit of diversification out of Europe, towards which its portfolio is heavily weighted, said Alec Abraham, senior equity analyst at Sasfin Wealth. It will also add more fast-growing ready-to-drink ciders, giving it a broader portfolio and so capture more growth in the alcoholic beverage market.

A walk into any liquor store will show who the profitable players are in the South African liquor industry. Except for independent wine producers, most alcohol will be internationally owned after the conclusion of the Heineken-Distell transaction. 

Castle Lager, Carling Black Label and Flying Fish are owned by the world’s largest brewer, AB-InBev, which was formed through the acquisition of American brewer Anheuser-Busch by Belgian-Brazilian brewer InBev, a merger of AmBev and Interbrew.

Amstel Lager and Sol are owned by Heineken, the world’s second-largest brewer. Savanna, Hunter’s Dry and Amarula were the South African fighters in the ring under Distell, but now they too will come under Heineken’s wing.

What is Heineken offering?

The Heineken offer will split Distell into two businesses. Distell’s cider and ready-to-drink beverages, as well as its spirits and wine brands, will form a new unlisted business, Newco. Newco will be combined with Heineken’s Southern African business and the Dutch group’s interest in Namibia Breweries Limited, which owns Windhoek and Tafel Lager.

Shares in Capevin — which contains Distell’s other brands, including its Scotch whisky unit — will be unbundled, with Distell shareholders offered R15 per Capevin share.

Heineken intends to own a minimum of 65% of Newco, with the remainder held by Distell shareholders who elect to reinvest. Distell shareholders are offered R165 in cash per share for their stake in Newco — or they can opt for unlisted shares in Newco. 

Altogether, Heineken’s offer to Distell shareholders comes to R180 a share. 

Business Day reported that the Public Investment Corporation (PIC), Africa’s largest asset manager, which owns 30% of Distell, was holding up talks, asking for a higher price of about R200 a share. 

The PIC bought a portion of Distell shares in 2016 when AB-InBev had to forgo them, as instructed by the Competition Tribunal, as a result of its bid to purchase SABMiller. 

The Stellenbosch-based investment holding company, Remgro, which owns the majority of Distell, said in a statement that it recognised the long-term strategic benefit of combining the relevant Distell and Heineken businesses and was supportive of the proposed transaction.

Remgro said it would vote in favour of Heineken’s deal, and that it intended to elect to receive Newco shares in exchange for its Distell shares. 

But Remgro will not accept the cash offer for Capevin shares, and will hold a controlling shareholding in the business. 

Remgro’s share price has declined by more than 35% in the past five years and this deal will benefit the company as the majority owner of Distell. 

“It’s certainly better than only owning Distell. A combined company will be a better quality company than just Distell on its own so I think Remgro certainly will benefit from that,” said Abraham. 

A move from beer

There has been a global shift from beer partly because of people becoming more health conscious. This means beer companies will have to reinvent themselves. 

The ready-to-drink alcohol industry, which includes hard seltzers, flavoured alcoholic beverages and pre-mixed cocktails, is under rapid transformation, with volume growth out-pacing that of other beverage alcohol categories globally, according to global market analysis firm IWSR (the International Wines and Spirits Record).

Independent analyst Simon Brown explained hard seltzers or seltzer-like products are growing in popularity as consumers look for sessionable, lower alcohol by volume options. 

A hard seltzer is flavoured sparkling water with alcohol. It is favoured because it is low in alcohol, calories and carbohydrates. 

Heineken is cashing in with this trend because Distell had already launched Vawter, its own hard seltzer, in March this year, as reported by the Financial Mail

Abraham said that from an industry point of view globally, spirits have taken market share away from beer in the past five to 10 years. 

Another trend is “premium­isation”, where consumers are drinking less or the same amount but buying more expensive alcohol. 

“The other advantage is that although beer is losing market share, the premium segment, which Heineken is in, is losing less market share than the mass market segment, where AB-InBev plays,” Abraham said.

“With this acquisition, you’ve got Heineken premium beer, Namibia premium beer and premium ciders from Distell. Heineken is getting a better product spread.”  

Competition

The Heineken Distell deal is still subject to approval by competition authorities. 

Black ownership is usually a requirement that holds weight for takeovers and is the reason the sale of Burger King was blocked some months ago. The Competition Commission found that the merger would lead to a significant reduction in the shareholding of historically disadvantaged people in the target firm, from more than 68% to 0%, as a result of the merger.

Heineken has provided a commitment that Newco’s operations will be at least 15% empowered from a broad-based black economic empowerment ownership perspective.

Abraham said multiple competition authorities are involved in the deal and the structure is of such as complex nature that it will probably take more than a year to finalise. This means Distell shareholders will not get a dividend in that period.

“Heineken is big in beer but Distell is cider and wine. It is not the same category and from that point of view one would say the transaction is complementary and not adding to an already large position in that market,” said Abraham. “It’s a different category so there won’t be market dominance —that will be Distell and Heineken’s argument.”

He said that whoever opposes the transaction will hold the argument that alcohol is alcohol whether its beer, wine, spirits or ciders.

Independent analyst Brown said he could not foresee any competition issues arising from the transaction because Heineken has a small presence in South Africa. 

Anathi Madubela is an Adamela Trust business reporter at the Mail & Guardian

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Anathi Madubela
Anathi Madubela is a business journalist with a keen interest in the retail sector.

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