LONDON—Diageo PLC said it would terminate its partnership with
Heineken NV in South Africa, as the world's largest spirits maker
moves to wield more control over an increasingly important
market.
The London-headquartered maker of Smirnoff vodka and Johnnie
Walker whiskey on Tuesday said it had agreed to restructure its
South African and Namibian joint venture with Heineken and Namibia
Breweries Ltd., ahead of a previously agreed 2018 termination
date.
"We now believe that Diageo has the necessary scale to move to
the next stage of growth," said Diageo Chief Executive Ivan
Menezes.
Diageo and its partners set up a combined company in 2004 to
sell their combined portfolio of beer, cider and ready-to-drink
products, in a bid to compete with behemoths Anheuser-Busch InBev
NV and SABMiller PLC, the world's two largest brewers.
Diageo housed its spirits brands separately, but marketed these
through an entity set up as part of the joint venture.
The company on Tuesday said it would sell its 42.25% stake in
the entity that held the combined portfolios of Diageo, Heineken
and Namibia Breweries, as well as its 15% stake in Namibia and its
25% stake in a brewery in Gauteng.
Diageo will buy the remaining stake in the marketing unit,
headed by Jeff Milliken, who will become head of Diageo in South
Africa once the deal gets regulatory approval, expected this
year.
Diageo will continue to make ready-to-drink products out of its
wholly-owned facility in Durban, while Heineken will brew Guinness
for bottled distribution under a license. Diageo plans to continue
importing canned Guinness.
Under the terms of the agreement, Diageo will get £ 128 million
($200 million) in cash. Mr. Milliken said the deal will be neutral
to per-share earnings and cost.
Diageo's market share in spirits has jumped to 40% from 26% over
the past nine years, according to the company, which said South
Africa is its fifth-largest spirits market by volume.
Heineken declined to make market share data by country
available, but Nomura analyst Edward Mundy said the brewer has
recently lost share in South Africa, in particular with Amstel
Light.
The Dutch beer maker will strike a new joint venture in South
Africa with Namibia Breweries, which the company said will be fully
focused on developing the beer portfolio and allow Heineken more
commercial control of its key brands in South Africa.
Africa represents an opportunity for Diageo, which has been
struggling with sluggish revenue growth in North America, its
largest market. The company has told investors that between 2013
and 2017, the South Africa liquor market is projected to grow by
45% to $2.39 billion.
Tuesday's move, said Mr. Mundy, might "encourage thinking that
the company could sell or spin off beer as a whole" in Africa.
However he insisted that beer was essential for Diageo's growth,
noting that South Africa can't be compared with the rest of the
continent, where beer is far more developed than spirits.
"Beer gives you a strong footprint to be able to springboard off
into developing a bigger spirits portfolio," Mr. Mundy said.
South Africa's economy has struggled as frequent blackouts and
labor turmoil have pulled business and consumer confidence to near
15-year lows. Mr. Milliken said the market is tough but that the
top-end of Diageo's spirits portfolio is growing over 20%.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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