Distell’s minority shareholder Ninety One poke holes on Heineken’s proposed take-over deal

SOUTH AFRICA – As the world’s second-largest beer manufacturing company, Heineken, nears to swoop up Africa’s leading producer and marketer of ciders, Distell, global asset manager Ninety One, has come out publicly to voice its dissent over the deal.

The South African born asset manager, holding 4% in Distell on behalf of its shareholders, has termed the take over bid as unfair and too low.

Heineken announced its offer to buy the South African company for R38.5 billion (US$2.55 billion) in November 2021, with the proposed scheme of arrangement involving splitting Distell into two entities.

The first unit formed will be Newco, an unlisted public company, 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.

These portfolios will be combined with Namibia Breweries Limited which Heineken is also eyeing, and the Dutch brewer’s 75% shareholding in Heineken South Africa and certain other fully owned export operations in Africa.

Distell shareholders are being offered R165 (US$10.9) in cash per share for their stake in Newco – or they can opt for unlisted shares in Newco, or a combination.

The second entity, Capevin, will house Distell’s imported drinks i.e. Scotch whisky unit and Gordons gin business. The shares in this entity will be unbundled and Heineken is offering Distell shareholders R15 (US$0.99) per Capevin share.

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Together, Heineken’s offer to Distell shareholders come to R180 (US$11.9) per share valuing the business at R40.1 billion (US$2.6 billion), which is seen as too low by Ninety One.

According to investment specialist at Ninety One Rob Forsyth, “The R180 (US$11.9) 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 (US$11.9), Distell is arguably in a PE range of 18 to 20 times.

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“Benchmarking all global beverage transactions over the last decade would also result in a range of valuations from R230 (US$15.2) to R250 (US$16.5) per Distell share,” he says.

In fact, Distell traded at around R190 (US$12.5) 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 (US$4.3), reports MoneyWeb.

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.

Distell better positioned compared to Heineken

Further to that, Forsyth highlighted that Distell is well placed to take advantage of global trends that have seen beer lose market share to other beverages like spirits and wine.

Globally, cider is growing and has strong appeal across genders; the South African beverage maker boasts of a wide range of cider offerings to include brands such as Savanna and Hunters, placing it as the second-largest cider producer in the world.

Also leveraging on local production flexibility on an economic scale, Distell can make excellent returns from beverages in Africa.

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.

Locks out institutional investors

The investment specialist also pointed out that shareholders have lost “unique” assets, following some of the beverage company sales South Africa has seen.

“Think Cadbury, Schweppes, Suncrush, ABI and then SABMiller to ABInBev. 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,” said Forstyth.

If the proposed transaction falls through Distell Group will disappear from the JSE on September 5.

He described the outcome as unfair, saying shareholders being given an option to remain in the unlisted entity post-acquisition would benefit significant shareholders like Heineken, more than the remaining shareholders like pension funds or unit trust holders.

“We find the absence of protection for long-standing pension savings startling. The price is too low. The structure makes it difficult for the average pension fund or unit trust to remain invested.”

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.

Accordingly, Ninety One will be voting against the scheme on behalf of its investors. Unfortunately, its stand will not make a difference. 

African alcohol powerhouse in hands of regulators after Distell investors vote yes

The Savanna maker’s CEO Richard Rushton has revealed that the company had engaged twice with Ninety One on its views.

However, he said Distell management’s unanimous view, as well as that of the independent and full boards, was that the “landmark transaction” is good for every party involved, including South Africa.

He added that the offer had gone through “an extensive” negotiation and evaluation process, using proven methodologies.

“As a board the offer is reasonable and fair. So, that’s our position, they have a different view, that’s their right as a shareholder, to express that view,” said Rushton.

Distell’s shareholders have overwhelmingly approved the deal giving it 94% support, in what is likely to be the largest foreign investment in South Africa this year.

According to reports by IOL, Remgro, which owns around 30 percent of Distell, voted in favour of the deal.

The Public Investment Corporation (PIC), which manages the state pension fund investments, holds 29.92 percent of Distell, and so also likely voted in favour of the deal.

Ninety One’s stance also seems to have had an impact as Distell shareholders holding more than 18 million shares are reported to have voted against the deal.

The merger is now subject to approval by competition authorities in South Africa and abroad.

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