E-Malt.com News article: Kenya & Tanzania: East African Breweries shareholders may see dividends drop after its separation from partner SABMiller - report

East African Breweries Limited’s separation with its business partner and now rival SABMiller is set to leave it with a Sh17.4 billion funding gap that could eat into shareholders’ take-home in the next couple of years, Business Daily reported on July, 12.

The two brewers have been business partners in Tanzania and Kenya on the strength of their co-ownership of Tanzania Breweries Limited (TBL) and Kenya Breweries Limited (KBL) since 2002.

But the Kenyan brewer last year opted to acquire rival Serengeti on claims that the partnership with the South African brewer was pulling back its operations — ending the eight year marriage of convenience.

This has seen EABL offer SABMiller Sh19.5 billion for the 20 per cent stake it held in KBL while the Kenya brewer is to sell a similar stake it owned in TBL through the Dar es Salam bourse that will earn it a maximum of Sh7 billion.

This coupled with the Sh4.9 billion it paid to acquire a 51 per cent stake in Tanzania’s Serengeti Breweries Limited has left the former cash-flush firm with a huge deficit whose implications to shareholders in terms of dividends and of indebtedness will become clear in coming days.

Analysts reckon that EABL could tap a shareholder loan from its parent Diageo or bridge the deficit with a combination of debt and internal resources in a transaction that observes say has hugely favoured SABMiller.

The brewer will also spend millions of shillings to upgrade the facilities of Serengeti Breweries to EABL standards and allow it to produce and distribute its flagship products like Tusker, Guinness and Pilsner in the Tanzanian market. “The funding gap will have an impact on EABL’s dividend policy in the next two to three years, especially when one looks at the impact of the new alcohol laws on its earnings,” says analysts at Kestrel Capital.

Similar sentiments were expressed by African Alliance in a brief to investors on the impact of EABL/SABMiller split: “This transaction will also require either external funding and/or adjustment in EABL’s dividend policy in the coming two to three years.”

The EABL is facing threats on its sales in the Kenyan market — which last year generated 83 per cent of the its profits — as the market settles to the new alcohol law that reduces the number of hours bars can operate to six hours on weekdays and nine hours at the weekends.

The financing of Tanzanian buyout and dividend payments, which each took Sh4.9 billion; in the period ended December coupled with a 24 per cent drop in cash generated from operations in period to December reduced the brewer’s cash to Sh2.6 from Sh7.9 billion in July and Sh8.2 billion in December 2009.

This is what is egging analysts to believe that the regional brewer will have to adjust its dividend policy in the short-term to meet its funding needs. In the past five years, the brewer has paid out Sh21 billion in dividends making it one of the most sought after shares, now priced at Sh211 on the Nairobi Stock Exchange.

Last year, it paid Sh8.75 a share as dividend pushing its total payout of Sh6.9 billion—accounting for 98.6 per cent of its net profits of Sh7.1 billion it posted in the year to March 2010.

But SABMiller appeared pleased with the transaction, arguing that it had received the better side of the deal.

EABL’s net profits drop to Sh4.1 billion from Sh4.2 billion as rising administrative expenses ate deep into sales—which grew 10 per cent to Sh20.4 billion over the period, but the recent increase its prices of its key premium products is expected boost its full year earnings.


15 July, 2011