East African Breweries Limited had hoped that through its September 2024 offer, it would take its ownership in Uganda Breweries to 100 percent. Photo / File
On September 3, 2024, Kenyan brewer East African Breweries Limited (EABL) placed a tender offer in which it sought to push its ownership in Uganda Breweries Limited (UBL) to 100 percent.
The offer had wanted to allow EABL buy out UBL’s minority shareholders at a value of Shs12.3b by mopping up the remaining 1.81 percent of UBL shares - around 2.18 million ordinary shares – since it already held the other 98.19 percent stake.
EABL had put Shs5,630 on the table for each share - well above its share price of Shs4,388.24 - offering minority shareholders, mainly retail investors, a sweet deal to walk away.
But as things look now, EABL’s plan fell through last week, with the offer returning a gross under-subscription.
Results released last week show EABL, which is UBL’s parent company, received sale offers of only 151,156 shares, meaning that most of the small owners opted to sit out of the transaction.
The offer fell short, managing to secure only 7.9 percent of the 2.18 million shares it had hoped to buy.
But after vetting and approvals, the final number of shares accepted dropped further - to just 3.6 percent of the issued shares, or about 1.81 percent of UBL’s total share capital.
Why? “Strong cashflows”, according to David Bateme, a research analyst and team lead, new business at Crested Capital.
“UBL isn’t your average unlisted firm. It’s a well-oiled cash-minting machine - and in today’s market, that is so rare. Shareholders know it, and EABL knows it,” he says.
One of the factors that makes it so appealing, he explains, is that “it’s a business that generates substantial revenue, with products widely purchased across the region. No shareholder in such a business would part with their stake, knowing the company is poised for even greater growth and that each time it will grow will give them more valuable asset growth and dividends.”
Simon Mwebaze, the managing director of Cornerstone Asset Managers, agrees, arguing that the company’s current shareholders are likely valuing it more for its future potential than for what the tender offer was offering.
One of the key factors that makes it appealing to investors, he says, is the diversity of products the company offers, which resonate with a wide segment of the population.
“If you have noticed, post-Covid-19, beer companies have expanded their product portfolios to include spirits, which are selling at a premium. This move is attracting more customers, and investors understand the long-term potential. They see the prospects of such businesses as more viable than short-term profits,” he says.
Spirits rise, beers hold
Mainstream spirits continue to steal the show, especially among the vibrant youth. Year after year, they are outperforming beer - with spirits net sales rising 10 percent compared to beer’s 12 percent growth.
Some of those sold by the Ugandan subsidiary include: Vat19, V&A, Uganda Waragi, Smirnoff, Richot, Johnnie Walker, J&B, Gordon’s Gin, Gilbeys, Ciroc Captain Morgan and Bond 7.
Themed marketing events and targeted advertising are adding even more fire to the spirits category.
But it’s not just about parties and premium labels. A clear shift in consumer behaviour is emerging. High-income earners are leaning into premium local and international brands, pushing up sales of premium beers and spirits by 13 percent year-on-year, according to EABL.
Valuation doubts
But one other thing that Mwebaze believes why EABL’s offer faltered was the uncertainty surrounding the valuation of the shares that the company used to buy off minority shareholders.
“It’s possible the shares were undervalued, and investors may have considered this and thought, ‘It’s not worth it.’ They might believe there is more to gain now or in the future, both from the company’s earnings – potentially higher dividends when valuing their stakes,” he says.
When EABL presented its offer to minority shareholders in early September 2024, it disclosed that it had hired an independent valuer - Mazars BRJ, a certified Ugandan accounting firm - to assess the value of its Ugandan subsidiary.
The valuation put UBL at Shs670.4b, slightly higher than the Shs659.2b EABL had recorded in its books at the time, based on prevailing exchange rates.
Mazars BRJ arrived at this figure using a combination of the Market Multiples Approach - specifically Enterprise Value to EBITDA (earnings before interest, taxes, depreciation, and amortization) — and the Discounted Cash Flow method.
In simple terms, this means the firm compared UBL to similar companies by looking at how much peers earn before interest, taxes, and other costs and then projected how much UBL could make in the future.
It’s like trying to figure out how much value you had get from owning a company based on the money it’s expected to generate over time - and then calculate what that future income is worth in today’s terms.
The problem here is that since UBL isn’t publicly listed, its shares don’t have a market-determined price.
That meant EABL couldn’t rely on stock exchange data for price discovery.
Instead, it depended on the independent valuer to come up with what it believed was a fair estimate – what a willing buyer and a willing seller might agree on in an open market.
This also meant that metrics like book value didn’t drive the pricing.
According to EABL, the final offer price of Shs5,630 per share for the 2.18 million shares for a total purchase value of Shs12.28b was based entirely on the valuer’s independent judgment of fair market value, and that is something that could have bothered the small investors.
Why shareholders could have held on
EABL’s 2024 financials tell a clear story: Kenya leads the pack in net sales, contributing 64 percent of the group’s revenue, while Uganda follows with 21 percent and Tanzania trails at 15 percent.
The ownership structure reflects this focus. EABL owns 100 percent of Kenya Breweries and 85 percent of Serengeti Breweries in Tanzania.
In Uganda, it held 98.19 percent of UBL before the tender offer — a figure that ticked up only slightly to 98.32 percent afterwards.
EABL, listed on the Nairobi Securities Exchange, is eager for full control of its Ugandan golden goose, but a small group of ‘stubborn shareholders’ are holding firm - and they know exactly what they are sitting on.
UBL is one of only four subsidiaries - out of EABL’s dozen - where the brewer doesn’t own 100 percent. The others are Serengeti Breweries (92.5 percent), UDV (Kenya) (46 percent), and East African Beverages (South Sudan), where it holds a 99 percent stake.
In moving to buy out minority shareholders in UBL through a tender offer, EABL was following in the footsteps of its British parent company, Diageo. In March 2023, Diageo executed a similar plan, acquiring an additional 14.97 percent stake in EABL via its wholly owned subsidiary, Diageo Kenya.
That deal - worth Shs641.2b - saw Diageo’s stake rise from 50.03 percent to 65 percent after snapping up 118.4 million shares at Shs5,424 per share.
For Uganda’s transaction, industry insiders hint that the move may be connected to the stake previously held by UBL’s longtime chairman, the late Martin Aliker, who passed away in April last year.
UBL itself had previously said that EABL was making the offer “to consolidate its ownership and streamline operations.”
EABL noted last week that the transfer of part of the acquired stake - 78,268 ordinary shares - had been effected and payments for each accepting shareholder completed, while a process to transfer the remaining 72,888 ordinary shares was ongoing and payments would be made “once the transfers are completed”.
EABL ran the offer on a “willing buyer, willing seller” basis, with no element of pressure on shareholders who would opt to hold on to their stock.
Financials bounce back
EABL rolled out the tender offer in the first week of September 2024, but at the time, the only financial information publicly available to guide shareholder decisions was the interim report released in January 2024 - covering performance for the last six months of 2023.
The scorecard showed mixed performance. The Group’s profit after tax had dropped by 22 percent to Shs193.9b, meaning the company was keeping less of its earnings as profit compared to previous periods.
The group’s expenses were also climbing fast, taxes growing by 10 percent to Shs1.5 billion, something that was equivalent to 44.1 percent of its gross sales, and its cost of production was also increasing by over 20 percent to Shs1.1 trillion, mostly because of the increase in the cost of sales.
The company told shareholders at the time that this was partly due to increased taxes on key materials like glass and sugar, along with higher fuel and electricity costs.
Additionally, new tax laws in Kenya were making it tougher for EABL to manage its cash flow, as they required the Kenyan subsidiary to pay taxes daily instead of monthly.
However, six months later, to December 2024, EABL’s financials show the group’s profit dip slowed from 22 percent to 12 percent, closing with Shs304.2b in profit.
Cost management improved, with the cost of sales, which had surged by 20 percent in the second half of 2023 to Shs1.1 trillion, slowing to 13 percent to reach to Shs1.97 trillion.
But EABL noted that the “performance was adversely affected by elevated interest rates and currency depreciation, which drove financing costs and foreign exchange losses up by 49 percent and 84 percent, respectively”.
Despite the headwinds, EABL rewarded investors handsomely, announcing a total dividend of Shs195.3 per share for the 2024 financial year, representing a 68 percent payout ratio, which was a sharp rise from Shs153.5 per share offered in 2023.
Undervalued stock?
EABL is a well-positioned player in Kenya, and its regional subsidiaries hold significant potential.
Many investment analysts like NCBA Investment Bank do expect steady growth for the company, supported by the performance of its subsidiaries in Uganda and Tanzania, which could drive revenue expansion and solidify EABL’s regional dominance.
However, EABL last year argued that it believed that its stock was undervalued, noting that its estimates put the value of the stock at Shs4,797.18 instead of the Shs4,213.93, which it had been selling as of July 29, 2024.
That stock has since risen, closing Friday at Shs5,190.66.
Thus, it is on this basis that UBL’s minority shareholders doubted EABL’s offer.
