Diageo Plc.’s (DEO) subsidiary East African Breweries Ltd (‘EABL’) announced that it intends to buy SABMiller's 20% stake in its own Kenyan unit for $225 million with the end a partnership that allowed the firms to produce and market each other's products.
As a part of the deal, to undo the cross-shareholding, EABL will sell the 20% stake it holds in neighboring Tanzania Breweries (TBL), a unit of SABMiller, through a public offer at a later date.
This will restore EABL with full control of Kenya Breweries Limited. Analysts expect the deal, coupled with EABL's regional sales, will boost its revenues.
Kenya Breweries has also agreed to terminate a Brewing and Distribution Agreement with SABMiller and will cease to distribute SABMiller’s brands in Kenya after a short transitional period.
The announcement seems to end the prolonged battle between the two giant brewers which kicked off when EABL’s intention to end a brewing and distribution agreement with Tanzania Breweries surfaced,where SABMiller held a 52.83% stake.
In 2002, EABL and SABMiller went for a share swap of their interests in their subsidiaries: Kenya Breweries Limited and Tanzania Breweries Limited. EABL acquired 20% of the equity of Tanzania Breweries. SABMiller Plc. acquired a 20% equity stake in Kenya Breweries.
Under the deal SABMiller could sell EABL brands through Tanzania Breweries Ltd in Tanzania, with EABL reciprocating and brewing and marketing SABMiller products such as Castle Lager in Kenya.
The partnership between EABL and SAB Miller in Tanzania went through turbulence in 2009, with EABL complaining of breach of contract on the part of Tanzania Breweries. This had led to low quality of EABL’s drinks that were produced by TBL and had put restriction on some of Diageo’s and EABL brands to enter the Tanzanian market. This led to EABL’s acquisition of 51% of Serengeti Breweries Limited at a cost of $60.4 million.
East African Breweries Limited is a large East African brewing company, wherein Diageo Plc is the largest shareholder. EABL's primary listing is on the Nairobi Stock Exchange.
The recent economic downturn deterred Diageo and the stiff competition faced from Pernod Ricard and Fortune Brands Inc. (FO) in the spirits business and Anheuser-Busch InBev (BUD) and Molson Coors Brewing Company (TAP) in the beer business make it an unattractive stock for investors.
Diageo holds a Zacks #4 Rank, which translates into a short-term Sell rating.
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