Why Ninety One opposes Heineken’s offer for Distell
18 Jul, 2022

Distell is a unique JSE-listed asset. Whilst the latest Vawter Cucumber Hard Seltzer may not tickle your taste buds, the chances are good that you have enjoyed their iconic well-invested brand portfolio, if you choose to imbibe.

Indeed, Distell is currently well placed to capitalise on a confluence of global trends. Beer is losing share to alternative beverages, spirits and wine. Tick.

Globally, cider is growing and has strong appeal across gender. Tick.

Local production flexibility at scale is winning. Tick. You can make excellent returns from beverages in Africa. Tick.

Unfortunately the ‘tock’ is that Heineken plans to unceremoniously snaffle this asset and seize the majority of this high-quality liquid investment opportunity.

Long-standing shareholders have a fair bit of experience losing beverage assets from the JSE. We have lost such unique diversifying growth assets before. Think Cadbury Schweppes, Suncrush, ABI and then SABMiller to ABInBev. At least in the latter transaction, shareholders had the option of remaining invested in a listed entity. We have not been given this option with Distell.

The proposed scheme of arrangement involves a complicated web of transactions between Heineken and Distell. The cash offer is not appealing. The R180 per share is at a steep discount to other listed global beverage companies. The peer group is diverse, but the median-listed price-to-earnings (PE) multiple to June of a global peer group is a fraction under 25 times. At R180, Distell is arguably in a PE range of 18 to 20 times. Benchmarking all global beverage transactions over the last decade would also result in a range of valuations from R230-R250 per share.

Distell has not paid dividends for two years and the latest trading update indicates a very strong balance sheet. Heineken – for the pleasure of contributing around 35% of gross revenue – will garner 65% of the shareholding. The Heineken business operates at inferior levels of profitability to Distell. Heineken will contribute less, hold more and then benefit from the outlined R1.5bn cost savings. That hardly seems fair.

Their argument is that you can always choose to remain in an unlisted entity. Well, the unlisted structure benefits significant shareholders, particularly Heineken, at the expense of the remaining shareholders, notably the average pension fund or unit trust holder.

If you opt for the unlisted shares, you would need permission to sell your shares in Newco and Heineken retains significant shareholder rights in Capevin, even if they hold only one share.

So not only is there no control premium but any shareholder should also immediately mark down their value in line with lower liquidity and reduced rights.

We find the absence of protection for long-standing pension savings startling. The price is too low. The structure makes it difficult for the average pension fund or unit trust to remain invested. Accordingly, we will be voting against the scheme on behalf of our investors.



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