12 September 2017

Kenya: EABL to Retain 51% of Serengeti Breweries

East African Breweries (EABL) is expected to retain its shareholding in Serengeti Breweries at 51 per cent even after converting Ksh15.3 billion ($150 million) loan to the subsidiary to equity, a move that will result in an estimated five per cent profit drop.

EABL took the deal as part of an agreement with Tanzania's Fair Competition Commission to bring to closure proceedings on its acquisition of Serengeti Breweries in 2010.

The competition authority had in July 2015 threatened to revoke the Serengeti deal, citing breach of takeover conditions.

The conversion will give other shareholders in Serengeti Breweries huge valuation gains as they will not be injecting new capital to match EABL but will retain their current stake in the brewer.

At the same time it is expected to hit EABL with revaluation losses that analysts estimate will result to five per cent drop in profitability.

"East African Breweries Ltd had an outstanding long term investment loan with Serengeti Breweries Ltd (SBL) of Ksh15.3 billion ($150 million) as at 30 June 2017.

"EABL has entered into a commitment to restructure the business of SBL through conversion of this intercompany long term investment loan and interest to equity," said EABL in its annual report.

Reneging on promises

The competition commission had accused EABL of reneging on promises made during the acquisition which included helping Serengeti increase its sales, gain market share and grow shareholders' value through capital investments.

Serengeti Breweries has reported losses in the past two years of Ksh1.7 billion ($17 million) in the year ended June and Ksh1.4 billion ($14 million) in 2016.

Its market share is estimated at 24 per cent, an improvement from 20 per cent two years ago, but still lower than the 28 per cent the brewer enjoyed during acquisition.

"We believe that the conversion disservices EABL with a potential one-off revaluation loss. As a result, we forecast 4.7 per cent decline in full year profit before tax to Ksh12.7 billion ($127 million)," said analysts at Sterling Capital.

EABL acquired its stake at Ksh5 billion ($50 million) in 2010 indicating the conversion of Ksh15.3 billion ($150 million) without dilution of other existing shareholders will have to be tailored in a complex transaction.

At the time of purchase EABL paid a Sh2.9 billion ($29 million) premium arguing that the amount reflected the anticipated synergies and benefits of acquiring Serengeti's customers.

The company wrote off Ksh285 million ($2.85 million) of that premium, known as goodwill, in the year ended June in what signals weaker-than-expected performance of the subsidiary.

Fine

Besides the capital restructuring, EABL recently paid an undisclosed fine to the Tanzanian Competition Authority due to failure to keep to the acquisition terms.

Notably, its contingent liabilities shot up last year when it said it settled the fine to Ksh793 million ($7.93 million) from Ksh298 million ($2.98 million) giving indication of the size of the penalty.

The capital restructuring exercise is set to be complete this financial year.

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