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Team Commentary

Namibia Breweries Deal Dynamics

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Namibia Breweries is set to acquire a 25% stake in the Sedibeng Brewery and further its stake in DHN Drinks by 9.5% after Heineken, Diageo plc and The Ohlthaver& List (O&L) Group of Companies, the controlling shareholder of Namibia Breweries Limited (NBS) decided to restructure their respective joint venture operations in South Africa and Namibia.

Picture1Brandhouse Beverages (Pty) Ltd (brandhouse) is a 50/50 distribution and cost sharing joint venture between Diageo and DHN Drinks (Pty) Limited (DHN). DHN is the entity which holds the licenses for the combined beer, RTD and cider portfolio of Heineken, Diageo and NBS. Heineken and Diageo each own a 42.25% stake in DHN with NBL owning the remaining 15.5%.

Diageo will sell its 42.25% stake in DHN to NBS and Heineken on the same terms so it will therebyincreaseHeineken’s stake from 42.25% to 75% and NBS’s holdingsfrom 15.5% to 25%. NBS will also buy the 25% stake that Diageo owns in the 4.5 million hector liter Sedibeng Brewery in South Africa, while Heineken will retain its existing 75% stake in the brewery. The total consideration payable by NBS to Diageo for shares in Sedibeng and DHN is R610 million.

Previously IJG estimated that a 15.5% share purchase in the Sedibeng Brewery would have cost NBS N$465 million based on an EV/hectoliter calculation. Thus the implied cost for a 25% stake in Sedibeng would have been N$750 million which makes the N$610 million offer seems reasonable

It is our view that the transaction will be 100% financed through debt, most likely through a South African banking institution and will be linked to jibar. If we assume that the debt will be issued at 8.5% (for arguments sake and which is a very generous yield), the additional finance charge will be N$51.85 million or 15.8% of FY14 profit before tax.

NBS and Heineken have formed a new joint venture in South Africa, which will focus on developing the beer portfolio and provides NBS with increased commercial control of its key brands in South Africa. As a result of the transaction and new agreement, which is subject to regulatory approval, the existing joint venture with regards to brandhouse, DHN and the Sedibeng Brewery will be dissolved ahead of the previously agreed termination date, April 2018. During the transition period, brandhouse will continue to operate as normal, and a transition agreement is in place between the three parties to ensure business continuity until Heineken and NBS complete the establishment of a new marketing, sales and distribution business in South Africa.

As part of the restructuring, Diageo will sell its 15% indirect shareholding in NBS to Heineken, increasing Heinekens indirect ownership to 29.9%. O&L will hold on to its 30.1% indirect stake with the balance being owned by local shareholders.Further, Diageo will acquire the remaining shares it does not already own in brandhouse, the beer and spirits sales and marketing joint venture in South Africa, which will become a wholly-owned subsidiary of Diageo

Picture2Diageo will receive a total net cash consideration of R2.5 billion while Heineken will pay a total net cash consideration of approximately R1.9billion to Diageo for the equity and debt positions it acquires in Sedibeng, DHN and NBL and Diageo. Completion of the transaction is expected in 4Q15 and is subject to customary regulatory approvals.

Namibia Breweries is set to acquire 25% stake in Sedibeng Brewery and further stake in DHN Drinks for N$610 million.

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NBS will buy Diageo’s 25% stake in Sedibeng, while Heineken will retain their current 75%. Diageo will sell their 42.25% interest in shares of DHN to Heineken and NBS on same terms so they will thereafter each hold shares in DHN in proportions 75%, 25% respectively. Total consideration payable by NBS to Diageo for shares in Sedibeng and DHN is R610 million.

BON MPC Expectations – 17/06/2015

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In the build-up to the Bank of Namibia’s MPC meeting, we always get a lot of calls from companies, individuals and the media, looking for a view on what the Bank is expected to do.

As we usually do, we discussed this in our morning meeting today, and I personally am of the view that give the recent data releases in the country, a hike is not warranted at the current point in time. The reasons for this view are simple:

  1. According to the NSA, GDP growth is slowing, coming down from 5.1% in 2013 to 4.7% in 2014.
  2. PSCE growth remains high, however growth in household borrowing has slowed notably, to just 12.1%, well below nominal GDP growth suggesting household deleveraging relative to income, is taking place. Concern in this regard is that installment credit growth remains high, at 19.2% – very much the current concern of the Bank of Namibia.
  3. Headline inflation has slowed to just 2.9%, the lowest level in many many years. While much of the demand-pull inflation remains a lot higher than this (often over 10%), the overall price pressure on Namibian’s is relatively low by historic standards.
  4. Foreign reserves appear to have stabilized, albeit at a relatively low level when assessed in NAD terms. Also, this position is likely to recover further when the country’s new mines start exporting.

As such, while the Bank of Namibia is likely to remain on a rate-normalization path over coming months, there is no urgent need for higher rates in the current period or immediate future. I would thus say that there is a 75% probability of rates remaining flat, and a 25% chance of a 25bp (0.25%) hike. That said, I am notoriously awful at calling the BON moves, so may well be way off.