Heineken’s nearly R40bn tie-up with Distell is seen by the market as a perfect match and a vote of confidence in SA, but how good the offer price is for shareholders in the JSE-listed owner of brands such as Savanna and Hunter’s Dry depends on their investment horizons.
The deal looks best for shareholders who intend to remain invested long-term in the unlisted entities that will emerge from the transaction. But for those with a shorter-term investment mandate, who cannot hold unlisted stock and have to take the cash offer of R180 per share, it could be considered on the cheap side, say analysts.
The proposed transaction comes with commitments to retain jobs and invest.
Heineken CEO Dolf van den Brink says the group wants to be a long–term investor in SA and is “very confident” about its prospects. Heineken plans to expand Distell’s platform, intends to keep jobs and secure a 15% holding for empowerment partners in the expanded South African business of the Dutch group that will emerge from this transaction and be headquartered in SA, he says.
“We really believe that by joining forces with Distell there is a lot of potential in the market. We are also quite interested in exploring together with Distell those other Southern African and East African markets like Botswana and Zambia all the way to Tanzania and Kenya,” says Van den Brink.
Distell CEO Richard Rushton views the deal as a “good news story for SA”.
“Here we have the world’s second-largest brewer ... that, notwithstanding the context of socioeconomic and regulatory risk in SA, wants to invest here in the long term.”
Here we have the world’s second largest brewer … that, notwithstanding the context of socio-economic and regulatory risk in SA, wants to invest here in the long term
— Distell CEO Richard Rushton
Protea Capital Management analyst Richard Cheesman says: “Heineken is doing all the right things; it is talking about extra empowerment, no jobs being affected, additional procurement and investment into South Africa. This should help the transaction get past the local competition regulator.”
Van den Brink says Heineken will “fully engage with competition authorities” and make commitments to them in due course. “Indeed it is our intent to guarantee employment, but I would rather keep the details for the discussions with the respective authorities.”
But Cheesman says there have been questions on whether “this is the best price that could have been achieved”. Distell holding back on dividends because of the transaction had probably added to this “disappointment”.
Distell’s shares fell 6.9% to R170 on Monday when the deal was announced, indicating some were hoping for a higher price. By the end of the week the shares were trading at R167.
In terms of the deal, Distell will be split into two unlisted entities, one called NewCo that will combine Distell’s wine, spirits and cider business with 100% of Heineken SA — and Heineken’s export markets in Kenya, Tanzania, Uganda, Botswana, Zambia, Zimbabwe, Eswatini, Lesotho and South Sudan — plus 59.4% of Namibia Breweries.
In this entity, Distell shareholders will have the opportunity to either reinvest in the unlisted group, or take a R165-per-share payout. A third option for shareholders is part cash and shares. Heineken will hold a minimum of 65% in NewCo.
The other entity, Capevin, will include all of Distell's Scotch whisky brands, such as Scottish Leader, with Remgro holding a majority stake of more than 50%. An option to take cash or reinvest applies to this part of the deal. Shareholders who elect to take cash will be paid R15 per share.
Chris Logan, MD of Opportune Investments, says the combination of Heineken and Distell is a “marriage made in heaven” but the R180 cash offer is not. He wonders whether the government’s seemingly hostile attitude to alcohol companies — in light of the harsh restrictions imposed on them during lockdowns and the high excise duties charged — may be behind what has been perceived by some as a discounted price.
“Do you know how much revenue the government got from Distell last year? R8.3bn on just excise tax alone and the rate just continuously goes up. The liquor industry has got nothing in return I’m aware of, except the stiffest lockdowns in the world in response to Covid.”
Logan believes that for Distell shareholders such as Remgro with longer investment horizons or the Public Investment Corporation (PIC), the deal would be positive as they would participate in the future growth of the unlisted entities. Remgro, which holds voting rights over 56.37% of Distell's shares, and the PIC, which has voting rights over 20.3%, are both expected to reinvest in the unlisted merged entities.
Logan says the market hoped for an offer north of R200 because over the past two years “Distell has performed fantastically and truly shot the lights out”.
“In 2021, which was marred by a lot of trading days lost for Covid, they earned higher returns and did better than 2019 pre-Covid.”
All Weather Capital senior equity analyst Cobus Cilliers says the offer price was considerably higher than Distell’s shares when news of the potential deal first broke in May. But some investors could consider the offer on the “low side of what they would have hoped for” as the company is “pregnant” with dividends.
Rushton says the deal represents a 53% premium to the 90-day volume average weighted price of the company’s shares at the time the group made the market aware of overtures from Heineken. Though the shares rose to R185 in recent weeks, Rushton says the 90-day average price is the truest reflection of the company’s value.
Heineken says its offer “fully values Distell’s business” and represents a significant premium of 35% over the 30-day average share price, 53% over the 90-day and 74% to the 180-day price It says it has received “strong shareholder backing” for the offer, which was also recommended by Distell’s board.
Vestact portfolio manager Michael Treherne says: “They are getting Distell at a discount to the global average for similar liquor companies so it is good news for Heineken, but the price they are paying for Distell is a premium to what it usually trades at in terms of relative earnings, which is good news for Distell shareholders.” The discount in the price would have taken into account “the regulatory environment” which has been “very harsh on the liquor industry” in SA.
Treherne says Remgro would have turned Heineken down if they thought the deal was too cheap. “You have an institutional investor here who knows the business intimately and is happy with the price and that has got to tell you something.”
Remgro said it was "unfortunately not at liberty" to comment on Distell as it is still "trading under a cautionary".
Rushton says that Distell views the offer as fair and went “through a rigorous process of evaluation” including a subcommittee of independent directors. An independent valuation by BDO also “arrived at the conclusion, as we did, that this is a fair offer”.
Distell says it will engage with shareholders to “show them why we think the offer is fair”.
Rushton says discussions with the PIC have been “positive and constructive”. The PIC did not respond to a request for comment.
Asked about the possibility of share option payouts or other remuneration for Distell management on the conclusion of the deal, Rushton said the transaction with Heineken “hasn’t been about how much management scores out of the deal”.
“Pursuing a premium beer category to complement Distell’s offering has been at the front and centre at all of the discussions.
“The remuneration and share options will come out as part of the whole disclosure we have to do and is being driven by boards and benchmarked. It is premature to disclose that information that is not available to all shareholders at this point.”
