What are the next steps for Heineken?

Despite South Africa’s visible structural challenges, as a market, we will offer interesting business opportunities to international companies. The problem is that they are often reticent to expand into a market where they do not know the operating environment.

The obvious ways to work around this is to either partner with a company that has a South African footprint or to purchase a South African company.

Heineken has had its eye on Distell for a long time. With the legal red tape done with, the deal is now complete which paves the way for one of Europe’s best-known brands to grow its influence in South Africa. 

All action after 18 months in limbo

The article points out that after nearly 18 months in limbo, Heineken and Distell finally received the final nod from the Competition Tribunal – and can now take on their biggest local rival, South African Breweries (SAB), as a merged entity.

The long delay probably benefitted Heineken because Distell is more valuable today than 18 months ago, says Sasfin Securities chief global equities strategist David Shapiro.

“If you have looked at the sets of results that have come out [since the deal was first announced] – they have been very good numbers, and unfortunately the price won’t be adjusted.”

The article adds that, in addition, Distell hasn’t paid dividends since the transaction was first announced.

“It hasn’t been allowed to pay dividends during this time because the transaction was pending – so it has deleveraged, and the balance sheet is looking pristine. The price 18 months ago was a fair price, so Heineken is getting a better deal today because of the delays,” said Protea Capital Management senior equity analyst Richard Cheesman.

Shapiro is surprised that large Distell shareholders have not since insisted on an adjustment to hike the price.

The ins and out of the deal

The article points out that in terms of the deal, first announced in November 2021, Distell will be split into two unlisted entities. “NewCo” will combine Distell’s wine, spirits and cider business (including Savanna, Hunter’s Dry and Amarula) with 100% of Heineken SA, along with Heineken’s export markets in Kenya, Tanzania, Uganda, Botswana, Zambia, Zimbabwe, Eswatini, Lesotho and South Sudan — plus 59.4% of Namibia Breweries. Distell shareholders could remain investors in the unlisted company or take R165 per share in cash – or a combination of cash and shares.

The other entity, Capevin, will include all of Distell’s Scotch whisky brands, such as Scottish Leader, and the Gordon’s Gin licence, with Remgro holding a majority stake of more than 50%. Distell shareholders could take shares in Capevin or get R15 per shares.

The article adds that Capevin made a commitment to sell its whisky business as soon as possible.

“One imagines that proactive investment bankers would have wheeled around various potential suitors for the international whisky business in the last 18 months,” says Cheesman. “We might see a transaction announced for these assets quickly. The company has also committed to returning any proceeds from that potential sales to shareholders and these could be significant.”

Planning is an issue

The article points out that but the bigger question is what the massive new Heineken-Distell vehicle is planning.

Cheesman said it was important to bear in mind that cash-flush Distell’s balance sheet is in a “pristine” condition having held back on dividends over 18 months, putting it on a strong footing for any expansion offensive as it takes on SAB.

“What will Distell do in the new Heineken ownership delisted world? With its deleveraged balance sheet, the company could get involved in some other corporate activity, although there are few potential targets in SA,” says Cheesman.

The article adds that the competition authorities have also mandated a large expansion programme, which will cost the company billions.

On Thursday, Distell said the tribunal’s final conditions aligned “broadly” with those proposed by the Competition Commission when it gave approval in November.

The original agreement between the merging parties and the Competition Commission saw Heineken and Distell agreeing with the Department of Trade, Industry and Competition to invest R16 billion over a period of five years. This included investing in the construction of a new greenfield brewery in SA, as well as significant procurement commitments, employment conditions, and black ownership.

“Distell is well positioned for this [investment] and it is something that Remgro and Heineken will encourage,” said Cheesman.

The article points out that it may also resume dividends to those shareholders who elect to remain in the unlisted entities, he said. Cheesman said these investors are also better positioned than those who have to take the cash offer of R180 per share because of client mandates.

Important milestone

The article points out that, on Thursday, Distell said the transaction is expected to be completed in April.

One of the main changes imposed by the Competition Tribunal, which released its conditions for the deal late on Thursday, was the South African employees who choose to transfer to Capevin would also benefit from NewCo’s agreed employment share ownership (ESOP) plan.

The article adds that within three months of the closing date of the transaction, the merger parties had to establish an “evergreen/perpetual” employee ownership plan that will have to hold a fully voting shareholding of about 6% which equates to a value of about R3.5 billion for South African employees “a majority of which shall always be” historically disadvantaged individuals.

There were also changes made to the number of retrenchments that would occur as a result of the merger, with the tribunal saying the “merger parties cannot retrench any employees other than the maximum number of 166 combined employees of Heineken SA and Distell”. It said that the number of retrenchments envisaged initially by the merger parties was 230, but this was reduced to 166 following evidence heard by the tribunal including from unions.

A perfect time for competition

There are a number of reasons why this deal will be good for South Africa.

SAB has had the lion’s share of the market in South Africa for a long time producing popular brands like Castle Larger, Carling Black Label, and Lion Larger. Distell came in and tried to compete with SAB but found that they did not have a marquee product that would make a dent into the brand loyalty that the SAB brands enjoyed. With Heineken, you now have a popular global brand going up against popular local brands and one can argue that Heineken is just as well-known globally as Castle is locally. Heineken should focus on developing another marquee product that would diversify their portfolio in the same way that SAB has diversified theirs. Is Windhoek strong enough?

While sin taxes are usually seen as low hanging fruits for Government to implement a heavy tax on, the recent budget showed a reprieve when it comes to this. This allows South Africans to enjoy their beer without hurting their pocket. This will only make the impending competition between the brewery giants all the more interesting.

Loadshedding is a significant challenge that Heineken will need to address. However, the company has been operational in South Africa for some time, so it knows the challenge it faces in this regard.

Heinekens strategy when it comes to this will be interesting to see. How deep does South African brand loyalty go? The fact that South Africans refer to every brand of dishwashing liquid as Sunlight or every brand of washing powder as Omo is very telling. South Africans are loyal to brands that their families have been loyal to for generations. There is an exception. Generation Z and Generation Alpha are very much brand agnostic and are trail blazers in the sense that they will break the convention of remaining loyal to a brand because it runs in the family. Focusing on capturing this market could serve Heineken well in its quest for superiority.