Spirits growing faster than beer in SA - analyst | Fin24
 
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Spirits growing faster than beer in SA - analyst

Jul 28 2015 18:31
Matthew Boyle and Thomas Buckley

London - Diageo does not want to continue sharing profits with their joint venture partners Heineken NV in South Africa as their spirits products are growing faster than beer, says an analyst.

Diageo said it’s dissolving a joint venture with Heineken NV in South Africa and neighbouring Namibia three years earlier than planned so the world’s largest distiller can fully own its operations in those countries.

Diageo will receive about R2.5bn from a series of transactions with Heineken and Namibia Breweries, the London-based company said on Tuesday. The Smirnoff vodka maker will buy out the Dutch brewer’s stake in Brandhouse, a sales and marketing entity, while Heineken will focus on beer, ending a joint venture with Diageo that began in 2004 to sell spirits, beer and cider in Africa.

“Diageo does not want to continue sharing profits with their joint venture partners as their spirits products are growing faster than beer,” De Wet Schutte, an analyst at Avior Capital Markets, said by phone. “The read through is that spirits in South Africa is growing well.”

South Africa is Diageo’s fifth-largest spirits market by units sold, and its share of the market has increased from 26% to 40% over the past nine years, the company said. The region is central to CEO Ivan Menezes’ goal to boost the company’s sales from the African continent to 20% of revenue, from about 13% now.

‘Positive move’

“This is a positive move for Diageo,” Schutte said. “For Heineken, it leaves them hanging in a sense. As a smaller player, Heineken may find it hard to grow market share.”

A spokesperson for Amsterdam-based Heineken said the deal will give it “increased scale and focus” in South Africa.

The joint venture began in 2004, and was reconfigured in 2008 for a 10-year term as the companies sought to counter the dominance in the region of SABMiller [JSE:SAB], which controls more than 90% of the South African beer market.

Diageo rose 0.4% to 1 827.5 pence at 12:07 in London, while Heineken was up 1% to €71.46 in Amsterdam.

Under the deal, Diageo is selling a 42% stake in DHN Drinks and a 15% stake in Namibia Breweries to Heineken. Diageo will also sell a 25% stake in a brewery in Gauteng, South Africa to the Namibian beermaker.

“Diageo has the necessary scale to move to the next stage of growth,” Diageo CEO Menezes said in the statement.

brandhouse  |  sabmiller  |  heineken
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