GlaxoSmithKline Consumer Nigeria Plc (GSK) held an investor conference call yesterday to discuss the proposed disposal of its drinks business to Suntory Beverage & Food Nigeria Ltd (Suntory).

  • Finance costs are expected to subside following settlement of huge intercompany payables which had hitherto limited earnings growth due to foreign exchange scarcity and devaluation.
  • GSK Nigeria intends to spend part of the sale proceeds (see background below) on capital expenditure for product extensions and new product introduction in consumer health care. Already, the company has commenced the production of “Panadol baby suspension”, and local packaging of its “Horlicks” brand. Management stated that they will begin local production of “Sensodyne” in Nigeria.
  • Management is investing aggressively on its route-to-market process. Already, they have split the route-to-market for the drinks business and consumer health care products. In a bid to increase coverage areas in the country, management has set a target to reach 100,000 distribution outlets in the 2nd year and 150,000 outlets in the 3rd year following the divestment. Currently, they have direct access to 65,000 distribution outlets.
  • Following from the disposal of the drinks business, management expects to run a tighter and simplified operating model as they focus on pharmaceutical health care products.
  • Overall, they expect a double digit growth in revenues in the second year as they begin to reap benefits from investments in capacity expansion and increased distribution channels.

Background

In a bid to re-align with global strategy on pharmaceutical and consumer health care products, GSK Nigeria agreed to a non-binding offer from Suntory to purchase its drinks business (Lucozade and Ribena). In 2013, GSK global divested from its drinks business but the Nigerian subsidiary (GSK Nigeria entered into a 10 year agreement with Suntory to continue the drinks business such that Suntory provides the concentrates whilst GSK bottles, distributes and markets the drink products (Lucozade and Ribena). The deal involves the sale of two-third of the Agbara site which holds the factory (approximately 6.45 hectares), plants & machineries as well as distribution facilities  directly in use for the production of the drinks. Employees primarily associated with the drinks business will also be acquired by Suntory. Since the consumer health care production line is in the factory, the transaction also includes an agreement that will allow GSK run the factory for the next 5 years while it gradually moves the consumer health care production line to the vacant site (approximately 3.6 hectares). Lease rent will be paid by GSK to Suntory during the 5-year operating period.

Transaction

The drinks business was valued at $79.2 million (N15.78 billion using N200 – the official exchange rate at the commencement of the deal. However, with the recent float and devaluation of the Naira to N280/USD, management estimates the transaction amount to be N19 billion based on an agreed exchange rate computation framework and the proceeds will be utilized in three major areas:

  • Payment of foreign denominated debts (Intercompany/trading payables).
  • Payment of 60 kobo dividend subject to shareholders’ approval at the EGM scheduled to take place on the 04 July, 2016
  • Capital expenditure to grow the retained business

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