News broke on Wednesday that Diageo the parent company of Guinness Nigeria Plc was looking to increase its stake in its Nigerian subsidiary to 70%. To the shock of many investors they were even willing to buy Guinness Nigeria shares at a price of N175, more than a 40% premium to the closing price of N125.05 as at September 9, 2015.
The impact of the news on the market was significant enough to pare down the JP Morgan induced losses of the All Share Index from about 4% intra-day to about 2.98% by the close of trading.
The question on analysts mind now is why is Diageo so hot on increasing its stake in Guinness? The company did not reveal much details as such one can only speculate. We have thought hard and suggest the following may have influenced this move;
The beer wars have been ratcheting of late around the world with the top two brewers in the world Anheuser-Busch and SAB Miller both making top acquisitions. Anheuser-Busch has also attempted a takeover of SAB Miller in 2014, a move that eventually fell through due to the huge debts the former had incurred on acquisitions. However, some analyst believe the deal is still in the works and could materialise as early as next year.
For beer makers like Diageo, it is in their best interest to play against the likes of SAB Miller or even their local arch rival Heineken. SAB Miller is already in Nigeria and have themselves made some juicy acquisitions in the past. They are cash rich and could see the current downbeat share price of Guinness as an opportunity to pounce. Heineken itself was a target of SAB Miller last year and promptly spurned the latter’s acquisition bid.
The folks at Diageo may have felt vulnerable and are now playing defense seemingly at any cost. The 54.3% they currently own is a vulnerable stake as Diageo is the only company that owns more than a 10% stake in Guinness. The remaining 45.7% is therefore in the hands of a diverse pool of shareholders that could be targeted by a predator competitor.
This in our opinion may be a good trigger for their decision to play up their stake.
Getting ready for a takeover
Alternatively, this could also be a smart move to set themselves up for a possible merger or takeover bid from a major competitor. We have said it earlier that the beers wars are alive as beer drinkers are now gravitating towards cheaper beers, wines and spirits. Thus cornering market share and extinguishing competition may just be the way to go for most major players. Guinness, being a strong brand may well be a future target and with Nigeria being one of its larger and profitable market, it is only logical that Diageo consolidates its holdings on its subsidiary ahead of any takeover bid. At just 54.3%, they appear vulnerable and have little leeway to force the hand of minority shareholders. At 70%? well it only gets easier for them to do any possible deal.
The company in its press statement already indicated that after seeking up to 70% equity in Guinness it still hopes to remain listed on the exchange. However, we take that with a pinch of salt as things could rapidly change down the line. A de-list proposition is even easier when they own up to 70% of the equity of the company.
This probably the most obvious guess for many especially as takeover goes in Nigeria. Owning more than up to 70% of any Nigerian company gives the parent company significant control which enables it decide the future and influence the operations of the company. Guinness probably needs such a control at this point of its operations considering its debts profile and dwindling profitability. Already they have changed CEO’s like two times in the past one year (though it claimed it had nothing to do with performance). Guinness paid down a significant portion of its debts this year and would probably need to pay down more and refinance some of it. Gaining 70% controls gives the parent company more leverage to influence the capital structure of the company.
These are at best speculations as we do not at the moment have any intelligence beyond what was put out in the press release on Wednesday. However, as more information become available we will report it.