Close

Not a member yet? Register now and get started.

lock and key

Sign in to your account.

Account Login

Forgot your password?

LIQUOR INDUSTRY – MIXED DRINKS

01 Mar KWV Holdings

HCI has a history of  consolidating  industries. It has  another chance  with KWV.

If it’s time to call the next round of  consolidation cocktails, which liquor  companies will be the main mixers ?

Logic would suggest that KWV —   though poised operationally at a delicate  juncture — could be the catalyst to  concoct a blend of the more disparate  parts of the liquor sector.

Why? KWV’s shareholder of reference  is HCI, which has proved its mettle as an  aggressive consolidator over the past  few years. Just look  at HCI’s role in  consolidating the  casino industry .

HCI is in the  throes of an offer  to KWV minorities, which many believe  points to a desire to take the liquor  company out of the public eye so that the  real job of turning operations around and  unlocking value in the 100-year-old company can begin. Most observers believe  HCI won’t garner too many shares in this  exercise with its offer at 850c/share, well  off the fair and reasonable estimate of  around R12/share. The last stated net   asset value was more than R18/share, and  the intrinsic value R24 .

Still, HCI has the financial muscle and  the street smarts to fortify a frail KWV  with new operating assets to lend much- needed diversity to its long-standing  grape-based brands. But the theory is  that HCI won’t try to transform KWV  into a major player until it tightens its  grip on the company considerably.

Observers might feel — especially in  light of an ominous R16,5m operating  loss in the half-year to end-December —  that it is non-negotiable and urgent that  KWV be broadened  and bulked up, but  KWV CEO André van  der Veen says while  acquisitions will always  form part of any expansion plan, these are  not essential to KWV’s  growth.

A number of liquor  industry observers feel  KWV might have lost  an opportunity by shutting out Gauteng-based  ready-to-drink (RTD)  specialist Halewood, famous for its Red  Square brand.

Halewood offers  KWV an array of  brands with high- volume potential  at a time when  KWV is belatedly  launching its own  alcopop offerings  under Ciao and  jimmijagger into a  competitive market.

Halewood CEO Mike  Veysie confirms the  company is still open to  talking to KWV.

A marriage of a still  well-capitalised KWV  (R160m in cash remains on the balance  sheet) and strong brand  developer Halewood   could be compelling.

Veysie says Halewood  has a raft of new products ready for launch, but despite having  annual production capacity to deliver in  excess of 80m litres of RTDs, Halewood  would need to invest in additional infrastructure to produce some of its new  offerings. “KWV has infrastructure in  abundance.”

KWV, though, seems intent to go it  alone for now. Van der Veen cautions  that considering mergers is more difficult  for an under performing company such as  KWV. “We would find it difficult to  extract full value for our business in any  merger discussion, given our recent financial results.”

Vunani Securities small-cap analyst  Anthony Clark believes it’s only a matter  of time before control of KWV changes  hands . “Let’s be frank, PSG sold HCI a  lemon. If Jannie Mouton [PSG founder  and chairman] could not make it work,  then what chance does HCI have?

“There’s a rich corporate culture endemic in KWV which is difficult to  change. I can see HCI tearing its hair  out. It’s going to be an extremely long- term story at KWV as the recently released interim results point to structural  problems in the business.”

Clark says KWV is a small player in a  consolidating market and that a tie-up  with a bigger player seems inevitable.  In this regard one wonders  whether brandhouse  might not  see KWV’s brandy and wine offerings as a logical product extension.

Clark suggests in his Small  Talk blog that Distell could  tilt at KWV. “But with the  complex structure around  KWV and its giant rival, Distell, it will be a herculean  task to sort out the shareholding structures. Longer   term, they should merge,  but who will blink first?”

He also raises the possibility of PSG taking another  tilt at KWV. “If HCI fails , will  PSG buy it back on the cheap,  remembering it still retains its  stake in Capevin Holdings  [which holds a major stake in  Distell]?”

The situation at Distell is  equally intriguing. Both Remgro  and PSG (subsidiary Zeder, to be exact)  have gradually increased their stakes in  Distell by buying shares in listed holding  company Capevin Investments and  Capevin Holdings.

Last month Remgro and Zeder pushed  their collective shareholdings in Capevin  Holdings — which holds 51% of Capevin  Investments (which with Remgro holds  58,2% in Distell) — through 50%. Zeder  now owns 39,4% of Capevin Holdings  and Remgro 11,3%. Remgro’s effective  stake in Distell is close to 34%, well  ahead of SABMiller’s 29,1%.

The control structure of Distell is cumbersome, harking back to arrangements  put in place in the 1970s when the old  Rembrandt Group and Louis Luyt lost  the beer war to SABMiller. Unfathomable  grandfather clauses hold the complex  shareholder structure together, including  the threat of losing licensing agreements  on certain brands should the pyramid  control structure be simplified .

Clark can’t see the shareholding structure resolving quickly itself at Distell. “It  needs a catalyst. Is that catalyst  PSG/Zeder, perhaps fed up with the  modest returns from Capevin, which  might be holding back the performance  of Zeder?”

He argues that PSG/Zeder might be  tempted to auction off their Distell stake,  dangling it between the two largest  shareholders, Remgro and SABMiller.  “This, I think, could come in the next  two years. The fuse has been lit … Zeder  must know it can spend the proceeds  from Capevin on better-yielding agribusiness opportunities.”

Mouton won’t be drawn on the Distell  control structure, though his remarks are  quite telling. “If I tried to speculate on  what will happen with Distell, I’d only  embarrass Remgro. But at the end of the  day, each and every control structure will  have to be revisited.”

As the biggest liquor operation outside  SABMiller, Distell is an obvious candidate for a local liquor sector champion.

Distell already has a sprawling local  presence, trading across the top and  bottom of the wine sector ( from Durbanville Hills and Fleur du Cap to Graça  and Tassenberg), the cider and RTD  segment (including market leaders like  Hunter’s and Savanna), brandies, white  spirits, whiskies and liqueurs.

Distell acquired the French Bisquit  cognac brand two years ago and might  prefer to make a big move abroad. Remgro, which holds sway as the biggest  shareholder, has a history of super-sizing  its key investments through offshore  deals: Rothmans International (now part  of British American Tobacco) or Medi Clinic Corp (now Medi Clinic International), for instance.

Whether the grandfather clauses that  keep Distell tied to a cumbersome control structure have inhibited its offshore  expansion is debatable. But the success of  Amarula, Distell’s marula fruit-based  liqueur, on numerous international markets suggests the company has the potential to become a global player.

BoE Private Clients analyst Peter Wille  believes it makes sense for Distell to bulk  up internationally. “Adding a big global  brand would make sense with 25%- 30%  of profits already made outside SA. The  acquisition of Bisquit is a good start, but  it’s niche.”

Brands expert Jeremy Sampson of Interbrand points out that there may be  significance in André Parker — the former SABMiller executive who headed the  brewer’s charge into China — serving on  the Distell board.

Distell MD Jan Scannell  says it’s always been a part of the company’s  growth strategy to explore distribution  and investment opportunities on an ongoing basis. “But there is nothing specific  to announce at this stage.” With Distell’s  offshore trading margins at 24% compared with the 17% eked out locally, it  should not be surprising to see Distell  push for a bigger international presence.

Encouragingly, Distell’s Savanna brand  is being marketed into Africa, the UK  and Germany. Scannell says Bisquit has  recorded heartening sales, especially in  China, while Amarula continues to reflect strong growth in many markets.

Last year Distell acquired a significant  stake in Brand Phoenix Ltd, a leading  UK-based wine distributor and the  owner of FirstCape (the top-selling SA  wine in the UK retail market).

Scannell notes: “This is just one example of how an enhanced route to  market has seen us increase our wine  listings. So we are certainly tapping a  broad range of markets across our product spectrum to build our global footprint.”

Source: Financial Mail – Marc HasenfusS