23 December 2012

Ethiopia: Raya Brewery Reaches Point of No Return

Residents of this small, but historic town, 662Km north of Addis Abeba, were upbeat on the morning of December 16, 2012. Thousands of them had descended onto the lush farmland, beneath the Bohera Mountain, south of Maychew, to witness a pledge some of its natives made two years ago, to erect a brewery there.

A town surrounded by a series of rocky mountains, known for their historical reputation, as decisive battlegrounds during the Italians march to occupy Ethiopia, in 1933, is soon to see an addition to the two factories already operating there. Raya Brewery will join the ranks of a water-bottling plant, to the north, and a chip wood manufacturing factory, farther to the west.

"It's long been overlooked," said a farmer, one of the many who congregated to witness the moment that the founding shareholders and the chief of the regional state laid the corner stone. "I'm pleased to see things appear to be moving now," he added, with a degree of pride in his home town.

It took two years of effort from the 58 founding shareholders, who first met at the Sheraton Addis. They included a number of Maychew's natives, such as; Tsadikan G. Tensay (Lt. Gen.), a former chief of staff of the Ethiopian army, and Ambachew Abraha, a former chief of the Ethiopian Shipping Lines (ESL).

Yet hardly any of the founding shareholders, and those that joined them later on, pulled the nascent project as much as Dawit G. Egziyabher, 62, a businessman born in the same region, but farther north, in the town of Adwa, 1006Km from Addis Abeba. His symbolic gesture last week was unmistakeable in asserting his place in the minds of this small town, with a population of nearly 30,000. He bought 15,000 Br worth of shares for Mengesha Reda, a traditional vocalist, somewhat of a domestic sensation, who played the local rhythm last Sunday.

Another businessman and native of Maychew, Rezene Ayalew, with shares amounting to five million Birr, has also matched this enthusiasm, buying an equal amount of shares for the singer. Nonetheless, the shares Dawit controls in the company, 22pc of the 248 million Br shares sold, makes him the single largest individual shareholder in the Brewery. If any other shareholder commands voting power in the company ahead of him, then it comes, rather, from an institutional investor. BGI Ethiopia, another brewery, with brands such as St. George, Castel, and Amber, has a 30pc share, after joining the company in July 2011.

Most importantly though, was that Dawit made his significant investment in the company when it was so desperately needed. Promoters of Raya Brewery, including Eyesuswork Zafu, a prominent businessman and chairman of United Insurance, Yemena (Jamaica) Kidane, former chief of staff at the Ministry of Foreign Affairs, and Haile Assegdie, CEO of Derba Midroc, were at odds with Brewtech, aHamburg (Germany) based company that had owned 26pc of Raya, from August 2010.

Brewtech had agreed to undertake the turnkey project of engineering, procurement and construction of the brewery, which was originally scheduled to be completed in 18 months.

Credited by Tsadikan, chairman of the board of directors of Raya Brewery, for producing worthy feasibility studies, Brewtech later pushed itself out of the process, after promoters felt the plant it had promised did not match their expectations, according to an insider of Raya Brewery. Subsequently, Brewtech had agreed to relinquish its shares with the company, and agreed to a payment of 200,000 dollars, for its feasibility studies.

It was an amount 100,000 dollars short of what it had initially requested to be paid, Tsadikan told the shareholders' general assembly, who met in Mekelle town, a day before launching the construction. It was Tekeste Gebru, representing the company's auditors, HST & Company, who qualified the financial statement of Raya Brewery for the past fiscal year, as the procedure followed to hire Brewtech for the job was "inappropriate." The company was, however, paid from Dawit's account.

The void created following the departure of Brewtech was sufficiently filled with the additional investments Dawit made last year, although he initially joined Raya a bit earlier, with an initial investment of five million Birr. It came from a rather unexpected corner, for he maintains a low profile, despite the wealth he has reportedly made from his dealings inSouth Sudan.

"It was a bit of a surprise to me," said Tsadikan, who persuaded Dawit to buy shares in Raya to start with. "I had expected him to commit the first 10 million Br, but little was I prepared to see him coming up with the rest."

Dawit has a rather unassuming personality, thus it is difficult to place him on the wealth ladder.

"I had my first diamond watch and yacht whilst still in my 20s," Dawit told Fortune, last week.

A father of three; Luwam (26), Nathan (17), and Selam (16), from his former wife, Dawit had first leftEthiopiain the late 1970s, crossing the border toSudan, trekking for two weeks. He had left behind a well paid job and a decent living in Addis Abeba, where he had been working in the curriculum department of the Ministry of Education.

"The political environment then was not healthy," Dawit recalled. "I decided to leave, and asked for a transfer to Asmara, where it would be convenient to leave the country."

He considers himself to be a person who is regularly embraced by luck. Unlike many refugees of those decades, he hardly toiled to face the hardship of life in exile. He met a close relative living in Khartoum, who was married to a Sudanese high ranking military official. With help from her and friends there, he travelled to Abu Dhabi, where he found a job at the Abu Dhabi National Oil Company, no less than a month after he had arrived. Later on, he started his own construction maintenance company, and became subcontracted by the oil company he was working for.

He stayed there until the early 1990s, only to return to Ethiopia following the change of government.

"I'd a commitment to come back as soon as possible; no longer than two years," he told Fortune.

Dawit came back six months after the rebels took government, in May 1991. Soon, he formed a company, Ethio-Global General Trading, where he owns a majority share and is involved in investment and trading; importing spare parts and medical equipment. Early on, he was a pioneer in the local private aviation business, a venture he rather stumbled on by accident.

Immediately after his return to Ethiopia, he had wanted to visit his family members in Adwa, during the years where a domestic flight was precarious, in both frequency and seat capacity. Front row seats, for instance, used to be reserved for senior government officials, and although he expressed his desire to charter a flight, he was told that there was no such service in Ethiopia, at the time.

He had followed the issue through with government officials, and when permitted to do so, established Gosh Air, located behind Addis Abeba's National Theatre.

It was a short lived venture, although one that led him to the business where he eventually would make his Fortune. He began to supply spare parts to helicopters and aircrafts, in Ethiopia and other countries in Africa, and got his roll-over prize, after he succeeded in brokering a deal to South Sudan, which acquired 16 helicopters, representing the manufacturer, Fortune learnt.

It was through such Fortune that he was able to surprise shareholders of Raya, when they met last year, with his unexpected investment of 25 million Br, which was subsequently doubled.

"It didn't matter where in Tigray it was; I wanted to invest in a project that brings job and opportunity to people in this region," Dawit told Fortune.

Indeed, this has not been lost on the residents of Maychew, who believe the brewery will bring many benefits, such as; work to their sons and daughters, business to suppliers, and economic growth to the town. Even now house rent has gone up, with the anticipation of people coming to the town in search of opportunity, according to a man who works in the town's hospital, having been transferred from another town in the region.

Raya Brewery has already acquired a condominium, built by the town's municipality, anticipating housing shortages for its employees. The company has also paid out 5.4 million Br in compensation to close to 50 farmers, who have lost their livelihoods from the 15ha plot the regional state granted to the Brewery.

Initiators of the project picked this particular location for a number of reasons; the existence of a sufficient quantity of spring water, a high yield of barely, the large northern market for beer, and the proximity to ports inDjibouti, according to Tsadikan, who grew up in the town after his parents had moved there from farther north. He told shareholders, who met in Mekelle's Axum Hotel last week, the company is now in a critical transition period.

"But, we have reached a point of no return," he told Fortune.

The company has hired PTA Consultancy to provide supervision services during the construction of the factory, and to secure installation and commissioning of the brewing machine and bottling plant. Two companies; a collaboration of BGM, DIO, and ZVU Potez, of theCzechRepublic, and the German, Krones, were selected from a bidder list of five.

These companies will be paid a total of 28 million euros, and are expected to get the brewery up and running within 18 months. The company has already succeeded in raising shares worth 248 million Br, from initial public offerings (IPO), over the past two years, achieving almost one third of the total project investment.

When commissioned, the brewery is projected to have an annual production capacity of 300,000hcl, with an option to double its capacity when expanded.

For a country that trails behindKenya's 12 litres per capita consumption andSouth Africa's 59 litres,Ethiopia's four litres appears to leave substantial room for new players within the domestic beer market. There still remains a gap of 3.6 million hectolitres, between current supply and demand, according to research made last year by Access Capital, a private company. Raya will contribute to no more than 15pc of the current market, which, at this time, is dominated by its major shareholder, BGI Ethiopia.

Nonetheless, with the arrival, into the domestic beer market, of international giants, such as; Heineken and Diageo, which both acquired state owned breweries (Harar, Bedelle and Meta) through privatization, competition has become rather cut-throat. Promoters of Raya have put their faith in their partnership with BGI, the French owned interest, which possesses the largest market share.

"It's not conceivable to survive in the industry without partnering with a company such as BGI, with an international clout," Tsadikan told shareholders.

Ethiopia's biggest brewing company, with the oldest treasure brand, acquired from the Ethiopian government, in the mid 1990s, for 10 million dollars, has plants in Addis Abeba, Kombolcha, and, most recently, in Hawassa (Awassa), 273Km south of Addis Abeba. Combined, these plants give the company a total production capacity of nearly two million hectolitres.

BGI's investment in Raya is perceived, in the industry, as a strategic investment to gain access to the country's northern market, which is contested by Dashen Beer, a joint venture between Dashen Brewery and Busbeery, aLondonbased equity firm.

Despite their success in charming such a crucial industry player to come on board, promoters of Raya have yet to accomplish what is now most critical in moving forwards. Their application for loans, made to the state owned Commercial Bank of Ethiopia (CBE), is pending approval, providing they complete all documentation, including EPC agreements with suppliers. They hope to repay the bank within eight years, with revenues of 264 million Br projected during the first year of operation.

"I'm confident that we will get the loan from the CBE," said Tsadikan.

With the country's ballooning trade deficit, and controversial foreign currency stock levels, within the national treasury, he cannot say as much about the availability of forex to open letters of credit to acquire the plant. If succeeded though, the board of directors of Raya Brewery are considering increasing the company's capital to 300 million Br, and floating more shares to the public.

They promise prospective shareholders a return on investment of 25pc, with possibilities to fully recover initial investment within just four years.

Dawit pledges to redirect his earnings, made from the investment in Raya Brewery, in order to support his philanthropic activities within his native town of Adwa, and its immediate neighbour, Axum. He is financing constructions of museums, libraries and research centres, which, according to him, are dedicated to developing the historical and cultural heritage of these globally prominent towns.

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