In the Spotlight - SABMiller's black empowerment drive
SABMiller's plan to sell a 10% stake in its South African Breweries (SAB) arm to black investors has received positive reactions from the majority of analysts and commentators, writes Chris Mercer.
SABMiller said this week that it would sell US$750m-worth of SAB shares, or a 10% stake, in three tranches to black retailers, employees and the wider community. The move will cost the brewer an estimated $220m.
Advantages to SABMiller from the deal could be three-fold. First, it enhances the brewer's compliance with the South African government's Black Economic Empowerment (BEE) programme, and second, by only offering shares to licensed retailers, the firm hopes to persuade unlicensed alcohol retailers in the country to go legal.
Third, some analysts have suggested that the move may help to bring more retailers on-side in the face of growing competition to SAB from Heineken.
Many analysts have reacted positively to the proposal, in terms of both its viability and motives.
Trevor Stirling, analyst with Sanford C Bernstein, said: "Unlike previous BEE deals from other companies, this leads to broad-based participation instead of shares ending up in the hands of a narrow elite."
He added: "Net-net, this appears to us to tick a great deal of politically important boxes. To achieve all this at a cost of less than 0.7% of Market Cap appears to us to be a good deal for shareholders."
SABMiller said that those taking up shares would have to make "a small cash investment" to cover administration costs, although the brewer added that "meaningful cash dividends" are expected to be paid out from the first year of the scheme, which will begin on 1 April 2010.
Citigroup said in a note: "SABMiller is giving its South Africa employees, potentially c.50,000 of its customers (licensed retailers) and arguably even the new Government, an incentive to maximise the profitability of SAB."
The analyst firm added, however, that it sees better investment value in rival brewers "given their greater scope for internal cost restructuring".
Redburn Partners, another analyst group, agreed with Citigroup's main assessment: "This aligns employees, customers and the Government into the ongoing success of the South African beverage business, which will likely have significant benefits to the operating environment for SABMiller."
Redburn highlighted the retailer share issue as particularly key: "This is of particular importance when it comes to the all important granting of the 'shebeens' licences, which has stalled in some key areas such as the Western Cape. In the statement, SABMiller highlighted that the share offering was open to liquor applicants and not just those that had already been licensed."
Several analysts pointed out that the deal has a greater chance of success than previous BEE initiatives put forward by other companies, because SABMiller requires no outside funding.
That means the banking sector, beleaguered by the global economic downturn, is not needed for the deal to go through. Consensus among analysts was that SABMiller would also succeed in pushing the deal through at a cost of less than 1% of its market capital.
As one of the largest South African companies, this move has been anticipated for some time.
As Bernstein's Stirling said: "SAB has been active in Black Empowerment for many years, with initiatives such as contracting logistics to owner-drivers, setting up local barley contracts and retailer training. However, BEE compliance also entails an equity participation element and until now, this was limited to the sale of a minority stake in SAB's leisure business Tsogo Sun Holdings."
Longer term, the ten-year share issue proposal will depend upon the health of the South African beer market.
SAB's lager sales by volume fell 2% in the 12 months to the end of March this year, while higher input costs sent operating profits at constant currency levels down by 8%, compared to the previous year, SABMiller said in May.
"Revenue growth of 11% on a constant currency basis reflected strong pricing in both lager and soft drinks although this was not enough to offset markedly higher input costs, and EBITA margin declined," said the brewer.
Competitors are also moving in on the South African market.
Last year, Heineken, Diageo and Namibia Breweries, in which Diageo owns a 14.6% stake, signed a three-way venture deal in South Africa. The venture, named DHN Drinks, aims to build share in beer, cider and RTD beverages. Both Diageo and Heineken have a 42.25% stake in DHN.
Heineken and Diageo are currently building a new brewery near Sedibeng in the country - to be 75%-owned by Heineken.
The timing of SABMiller's BEE initiative, therefore, looks intended to shore up the brewer's defences against an invasion of foreign rivals in its South African heartland.
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