KBL faces uncertain future

Mbongeni Mguni | Friday February 7, 2014 13:55

 

Of  late, Sechaba Brewery Holdings, which holds 60% equity in the Kgalagadi Breweries group, has been the subject of intense market speculation following its shock announcement last December that it was weighing a Botswana Stock Exchange delisting.

This week, market insiders told BusinessWeek that KBL executives had already intimated that an increase to the alcohol levy, which currently stands at 50%, could trigger sustainability issues and force the 37-year-old group to drastic measures.

'Executives are saying an alcohol levy level between 55 and 60% could force them out of the country due to sustainability issues,” an insider close to the latest developments revealed.

“The potential delisting from the BSE would be the first step towards exiting from the country. The delisting is also designed to be a shock move intended to show authorities that relocation is a possibility.”

It is understood that under the relocation scenario, KBL manufacturing would move to South Africa, with a distribution division remaining to service the Botswana market. The majority of the group’s workforce of close to 1,000 is employed in production, with distribution partly outsourced as part of empowerment schemes.

By last year, the KBL group had four traditional beer breweries, a clear beer brewery, a sparkling soft drinks production plant and six sales and distribution depots.

Other market watchers said the announcements on possible delisting were designed to apply pressure on authorities against further increases in the levy, which has risen almost annually each November since its introduction in 2008. The analysts told BusinessWeek that an exit from Botswana would likely take the form of SABMiller Africa BV making a bid for the shares in Sechaba it presently does not control.

By last year, SABMiller Africa BV owned about 17% of Sechaba, while its sister subsidiary, SABMiller Botswana BV owned 40% of the KBL group. SABMiller Plc, the multi-billion Pula mega-group based in London, holds controlling equity in the sister subsidiaries.

“You would expect SABMiller to move to take over the shares in Sechaba it does not presently own, with an offer representing a premium on the trading price,” another market commentator told BusinessWeek.

'The board would recommend approval or rejection of the takeover to shareholders, who would then vote at some point.

“The challenge is that Sechaba is dominated by large institutional investors, including the Botswana Development Corporation, who can fight a takeover and even counter it with a buy-out effort.

'Unlike retail investors who tend to be easily persuaded, institutional shareholders have top financial, legal and brokerage advisers who may see an upside to holding on to Sechaba.”

The fact that Sechaba was among the BSE’s biggest gainers last year and also among the highest traded stocks, would also influence take-over talks. “SABMiller would have to convince the targeted shareholders that it is in their best interest to cede control, as the business is becoming unsustainable and is one major levy increase away from failure,” the commentator said. On Thursday, KBL group managing director, Johan DeKok, painted a gloomy picture of the beverage giant’s future.

“The business has already had to downscale both on the clear beer and sorghum beer side, due to the combination of the levy and traditional regulations,” he said in a written response to enquiries.

“Our elasticity models indicate that for every one percent increase in real terms we lose a negative one percent in volumes.

“Up to now we have been protecting the business by growing the non-alcoholic brands, but there is a limit to this and its not sustainable.

“The beer side has been helped by market share recovery, without which we would probably have been forced to close already.

“However this recovery is also not open ended.”

The group’s last financial statements, for the six months ended September 30, 2013, continued the downtrend in clear and traditional beer volumes, although profits were supported by production cost savings, among other factors.

The year up to March 31, 2013, KBL group’s alcoholic volumes fell 13% year on year, and by a further eight percent in the six months to September 30, 2013.

Earlier in the week, BSE CEO, Hiran Mendis told BusinessWeek that Sechaba was yet to approach the local exchange on any of the latest developments regarding its listing.

“Any delisting, whatever the company, is not something that we would want,” he said.

“Any delisting has a negative connotation to it. Companies look at their listing from a strategic point of view and what the exchange can do is see how to make their lives easier and how to make the exchange relevant to their commercial requirements.

“We have to make the exchange of strategic importance to companies but we cannot stop them from delisting.” Mendis said in terms of access to capital, the stock exchange held an advantage over other financial institutions, as it offered companies the ability to continuously value themselves.

The market is eagerly awaiting the May release of the KBL group’s annual results for the period ended 31 March 2014, for pointers as to the direction the beverage giant will take.