International Breweries (Intbrew) has just notified the NSE that it will be exploring the possibility of a merger with Intafact Beverages and Pabod Breweries (both unlisted ABInBev subsidiaries). No guidance has been provided on a timeline, or on the structure of the transaction.
It is estimated that International Breweries controls 6% of the Nigerian beer market while, Intafact Beverages (Intafact) and Pabod Breweries(Pabod) have a combined market share of 13%. Should the proposed merger go through (and excluding any potential revenue synergies), the resulting entity would therefore be expected to have a market share of 19%, following closely behind Guinness Nigeria with 21%.
Nigerian Breweries still maintains a distant lead at ~60% market share. On capacity, we estimate that AbInBev’s total installed capacity in Nigeria at 4.9mhcl with Intafact controlling 2.1mhcl, IB controlling 1.8mhcl, and Pabod Breweries with ~1mchl. While still lower than the ~8.4mchl capacity which we believe Guinness operates, its utilisation is significantly higher at close to ~85%. AbInBev’s management indicated that it was facing capacity challenges in Nigeria on the back of the strong performance of its brands and will be seeking to expand capacity in the next two to three years. It also stated that it grew volumes in the double digits in Nigeria in 1Q17 (4Q17 for IB).
The combination of the Nigerian ABInBev businesses will streamline operations and eliminate duplicated costs. Further, given strength of the different business’ brands in their respective regions , it is likely that the combined entity will be able to generate revenue synergies from cross selling. The cross-selling of brands in the South West, especially the Hero lager and some Castle brands which are under licence to Intafact. Even with IB’s annual sales being ~11% of NB’s, the company’s operating margins have been stronger in recent periods. A merger will therefore further dilute back office costs and boost margins, in our view.
Regarding the structure of the transaction, the iggest question is whether International Breweries will be delisted in the process. The stock currently has a free float of 28% vs the minimum regulatory requirement of 20%. Based on the current make up of ABInBev’s most important subsidiaries, it would appear that the company is more inclined towards 100% ownership of its subsidiaries, which would imply that a delisting would be the preferred outcome.
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