The recent announcement by International Breweries regarding a debt-to-equity conversion prompts a discerning question: is this move akin to a ‘Greek Gift’?
In this context, the term ‘Greek Gift’ denotes an ostensibly generous or advantageous proposal that harbors hidden motives or carries unintended repercussions.
While the conversion seems to help the company avoid bankruptcy or liquidation and possibly bring the company back to profitability, it could dilute existing shareholders further into the minority in the long run if the process is not well managed.
International Breweries has been grappling with escalating losses over the past half-decade. Despite its top-line growth, it has found itself entrenched in a cycle of losses, culminating in an after-tax loss of N70.026 billion in 2023, a sharp increase from N27.79 billion loss in 2019.
This financial turmoil persists, despite the company’s reliance on leverage, as reflected in its total debt to equity ratio of 3.2x, equity multiplier of 6.28x, and debt to assets ratio of 52%.
This parlous balance between growth and financial instability has raised concerns about International Breweries’ ability to sustain profitability and dividend payments, which have remained elusive over the past five years.
The company’s high level of debt poses significant challenges to its profitability outlook and share price performance, highlighting the urgent need for strategic intervention.
As of December 31, 2023, the company’s loan portfolio amounted to N374.339 billion. According to the financial statements’ notes, a loan of $424m with an outstanding balance of $389.08m (2022: $309m) obtained from Citi Bank in 2018 with maturity date of May 2021 was rolled over for an additional 3-year period.
In response to this discouraging financial picture, International Breweries has embarked on a strategic move to tackle its debt burden head-on.
At its Extra General Meeting of April 15, 2024, the company proposed and received approval for a shareholder convertible loan of US$379.9 million from AB InBEV Nigeria Holdings BV, for the repayment of this loan obtained by the Company from Citibank Abu Dhabi.
Additionally, the sum due from the shareholders loan should be channeled towards the payment for any shares subscribed for by AB InBev Nigeria Holding BV in the company’s Right Issue that has been approved by the Shareholders of the Company.
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However, this debt-to-equity conversion is not without its implications, particularly for shareholders. Converting debt to equity typically involves issuing new shares, leading to dilution of existing shareholders’ ownership stakes, including minority shareholders.
The accompanying rights issue presents an opportunity for shareholders to mitigate this dilution by subscribing to additional shares.
AB InBev Nigeria Holdings BV, as the majority shareholder with 78.44% holding, stands poised to weather the storm, potentially strengthening its grip on the company.
In contrast, minority shareholders may face a greater degree of dilution if they opt out of the rights issue, further diminishing their proportional ownership stake.
Despite these challenges, the conversion of debt to equity offers a ray of hope for International Breweries. By reducing its leverage, and consequently high interest expenses, and improving liquidity position and financial health of the company. This strategic move could pave the way for long-term profitability and value creation.
In this light, the benefits extend beyond majority shareholders to encompass all stakeholders, including minority shareholders, who stand to gain from the potential increase in the value of their investment over the long term in contrast to bankruptcy that would have resulted from excessive debt burden.
