Ninety One voices its dissent before clock strikes midnight on Heineken-Distell deal

About 56% of Distell shareholders have voiced their support for the proposed deal that will see global brewer Heineken acquire the maker of Savanna, Hunter’s Gold and Amarula, and delist it from the JSE – assuming the regulatory boxes are ticked.

But Ninety One is not one of these. Holding 4% on behalf of its shareholders, the asset manager has come out publicly to voice its dissent and to state that it will vote against the transaction.

Distell is a unique JSE-listed asset that is well placed to capitalise on a confluence of global trends, says Ninety One investment specialist Rob Forsyth. 

“Beer is losing share to alternative beverages, spirits and wine, while globally, cider is growing and has strong appeal across gender.” 

In addition, local production flexibility at scale is winning, while Africa – where Distell has built good routes to market – is an increasingly attractive beverage market. Heineken, he says, plans to unceremoniously snaffle this asset and seize the majority of what is a high-quality liquid investment opportunity. 

The proposed scheme of arrangement involves a complicated web of transactions between Heineken and Distell. And while the offer of R180 per share comes at a 35% premium to the average trading price in April/May 2021, the month before the first cautionary announcement was made, Forsyth notes that this is cheap when compared 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,” he says.  Benchmarking all global beverage transactions over the last decade would also result in a range of valuations from R230 to R250 per share. 

Distell has not paid dividends for two years and the latest trading update indicates a very strong balance sheet – interim results are scheduled for release on about 24 February. 

Heineken – for the pleasure of contributing around 35% of gross revenue – will garner 65% of the shareholding, he says. In addition, the Heineken business operates at inferior levels of profitability to Distell and will contribute less, hold more, and then benefit from the outlined R1.5-billion cost savings. “That hardly seems fair.”

Shareholders are invited to remain in the unlisted entity, but this is an unattractive proposition as 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.”

Other asset managers have previously commented on just how attractive a proposition Distell is.

“The beer market is under pressure globally,” Reuben Beelders, CIO at Gryphon Asset Management, told Business Maverick in an interview in November. “This is a good time for big players like Heineken to invest in the South African market and implement a multibrand strategy.” 

Just under three-quarters of Distell’s business is in South Africa, with slightly less than 20% from other African countries. In terms of categories, 36% is cider and RTDs, 39% spirits and 25% wine. 

“The parts that are attractive to Heineken include the strong South African cider and ready-to-drink business, which have big potential synergies, and a multicategory pan-African business with distribution and potential revenue synergies,” said Bernstein analyst Trevor Stirling at the same time.

One hiccup could come from global competitor Diageo, owner of Gordon’s London Dry gin, for which Distell owns the SA distribution rights. Diageo believes that if the deal goes ahead, it will trigger a change of control clause, allowing it to claw its brand back – and it’s prepared to take the matter to court.

In the meantime, longstanding shareholders have a fair bit of experience losing beverage assets from the JSE. Think Cadbury Schweppes, Suncrush, ABI and, more recently, SABMiller to ABInBev. At least in the latter transaction, shareholders had the option of remaining invested in a listed entity.  

“We find the absence of protection for longstanding pension savings startling. The price is too low and the structure makes it difficult for the average pension fund or unit trust to remain invested,” says Forsyth.

Shareholders will vote yay or nay for the scheme of arrangement at 11am on Tuesday, 15 February. DM/BM