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Diageo goes solo in South Africa

Diageo has decided to forge its own path in the buoyant South African market, restructuring its business through the termination of a series of joint ventures.

The move brings to an end partnerships with both Heineken and the Ohlthaver & List group, which holds a majority stake in Namibian Breweries.

Diageo will sell its 42.25% equity stake in Diageo Heineken Drinks, its 25% equity stake in South Africa’s Sedibeng brewery to Namibia Breweries and its 15% equity stake in Namibia Breweries to Heineken. All associated shareholder loans will also pass to Heineken.

In return, Diageo will acquire the remaining shares it doesn’t already own in Brandhouse Beverages, a joint venture established in 2004 between the drinks giant, Heineken International and Namibia Breweries to sell Diageo’s spirit, RTD, cider and Guinness brands alongside the two other companies’ beer portfolio.

This development marks an early termination of the Brandhouse partnership, which was reconfigured for a further 10-year term in 2008.

In addition, Diageo will receive a net cash payment of ZAR2.5 billion (around £128 million) in a transaction that is expected to complete before the end of 2015, subject to regulatory approval.

The decision by Diageo to split from its beer partners suggests that the company would prefer not to share the profits from a spirits business that is growing rapidly in South Africa, now its fifth biggest market by volume for this category.

Indeed, Diageo noted “a significant opportunity for our brands 
given how they have outperformed beer brands despite being under-weight in terms of numerical distribution in main market.”

Diageo brands such as Johnnie Walker, Smirnoff and Captain Morgan have helped its share of South Africa’s spirits market grow from 26% to 40% in the last nine years. While the total South African spirits market grew by just under 10% between 2010 and 2014, IWSR data shows that Diageo’s spirits growth here during the same period stood at 14%.

Alongside the 47% growth seen last year in South Africa by the company’s Reserve luxury spirit portfolio, which includes Johnnie Walker Blue Label, Cîroc vodka, Don Julio Tequila and Tanqueray No. Ten gin, Diageo highlighted the “very attractive” potential for its premium and mainstream brands.

Nevertheless, despite speculation about how easily Diageo’s beer interests sit with its burgeoning spirits empire, the company clearly views beer as an important route into the wider African drinks market, where branded offerings are rising in tandem with the continent’s expanding middle class. The most recent sign of this interest came earlier this year when Diageo took control of South Africa’s United National Breweries. 

Announcing the split, Diageo CEO Ivan Menezes commented: “We have worked very successfully with Heineken and NBL throughout our partnership, growing the beer business and establishing market leadership in spirits. From this leadership position we now believe that Diageo has the necessary scale to move to the next stage of growth for spirits, RTDs and our beer and cider portfolio in a focused, simplified ownership structure.”

Jean-François van Boxmeer, Heineken CEO & chairman of the Heineken executive board, confirmed that the group had “benefitted enormously” during this 11-year collaboration with Diageo.

Continuing, he said: “Our new structure allows us to focus solely on the beer category and strengthens our platform for continued growth. We look forward to working with our longstanding partner Namibia Breweries and are excited about our future prospects in this important part of the global beer market.”

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