- March 1, 2012
- Posted by: admin
- Category: 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