British drinks giant Diageo’s plan to make a big asset sale has turned the spotlight on its subsidiary East African Breweries Limited (EABL) in a period when the multinational has exited three African markets in quick succession.
The UK firm on Tuesday unveiled a $500 million (Sh64.65 billion) cost-cutting programme and assets disposal plan as part of its “asset light model” aimed at reducing volatility in Africa and driving better returns.
This prompted both international and local analysts to single out EABL and Diageo’s Chinese baijiu business as top candidates for a sale.
The Nairobi bourse-listed EABL, where Diageo has a 65 percent stake worth Sh100 billion, stood out because it was the British brewer’s last major asset remaining in Africa.
The company has offloaded several African brewing operations as part of its move to an “asset-light” model in markets with greater currency volatility.
In April, it sold its entire stake in Seychelles Breweries Ltd, an 80.4 percent stake in Ghana Breweries and last year ceded a 58.02 percent stake in Guinness Nigeria.
This followed exits in Ethiopia and Cameroon in 2022.
Nik Jhangiani, Diageo’s chief financial officer, said on Monday that he saw “opportunities for substantial changes” to the group’s portfolio.
“It’s going to be above and beyond the usual smaller brand disposals that you’ve seen over the last three years,” Jhangiani was quoted by the Financial Times.
Talk of disposals comes barely two years after Diageo bought additional EABL shares in a Sh22.7 billion deal that grew its stake from 50.03 percent to 65 percent.
The 65 percent stake was worth Sh97.6 billion yesterday, a pointer that a deal would require deep-pocketed investors to close.
“With Diageo plc leaning towards its rich spirit portfolio globally and its continued exit from beer in Africa, we begin to speculate on a likely strategic exit by the shareholder (similar to Nigeria and Ghana) in EABL in the medium term,” said Standard Investment Bank, a local investment bank.
The investment Bank reckoned that compared to other markets where Diageo has operations, Africa accounted for only nine percent of its net sales, with the EABL accounting for 46 percent of that performance.
The biggest contribution to Diageo’s net sales came from North America (39 percent), Europe (24 percent), and Asia Pacific (19 percent). Latin America also made a small contribution at nine percent.
Diageo on Wednesday declined to comment on the fate of its EABL stake.
“We do not comment on market speculation,” Diageo said in an e-mail response to the Business Daily.
Diageo has come under pressure from investors to cut costs and reduce leverage amid sluggish demand.
Wider concerns that the industry, which is battling a reduction in drinking, may fall into the structural decline that has afflicted tobacco companies have weighed on Diageo shares.
The UK multinational expects its $500mn cost-cutting programme will help the group sustainably deliver about $3 billion in annual free cash flow from next year, compared with $2.6 billion last year.
“From Diageo’s current market capitalisation and our value generation estimate, our back-of-the-envelope calculation places the East African subsidiary (EABL) at an estimated market worth of $2.79 billion (Sh360.75 billion) 2.35 times its current market cap (including debt), which not only signals a likely case of undervaluation (from a revenue generation point of view), but also potentially higher multiples in the event of an exit compared to current levels,” said SIB in January investors note.
EABL shares on the Nairobi bourse have gained 8.3 percent since the start of the year.
In January 2024, reports emerged suggesting that Diageo was considering selling Tusker along with other beer brands, claims that were dismissed by the EABL CEO Jane Karuku as “market speculation.”
Tusker remains a flagship brand for EABL and holds significant cultural and market value in the Kenyan market.
Globally, Diageo has denied reports this year that it is selling Guinness, which has enjoyed a period of strong growth, or its stake in LVMH’s struggling drinks division, Moët Hennessy.
It owns some prominent scotch whisky brands, including Johnnie Walker (Red, Black, Double Black, Gold and Blue Label), which the EABL sells.
Diageo, which was formed in 1997 through the merger of Guinness Plc and Grand Metropolitan, acquired majority control of EABL in 2000.
Guinness had previously held a minority stake in EABL, and the merger led to Diageo inheriting this interest. By 2000, Diageo increased its stake to become the majority shareholder of EABL.
EABL’s net income dropped 11.79 percent to Sh10.87 billion in the year to June last year, marking the second year in a row it reported a drop.
The decline was, however, softer compared with 20.87 percent for the year ended June 2023 to Sh12.32 billion.
The firm attributed the slide in net profit largely to the elevated cost of borrowing and weakening of the shilling against the dollar in the review period.
There was a recovery in the six months ended December last year, with net profit rising 19.6 percent to Sh8.1 billion on higher sales and lower loan repayment costs, helping the brewer declare an interim dividend.
