In 2020, Delta Corporation completed the acquisition of United National Breweries (UNB) from Diageo Plc, a deal that had been in the works since 2018. According to various reports, Diageo acquired UNB after purchasing the remaining 50% of the business. for US $ 36. million euros in 2013 and alluded to a total one-off loss of approximately US $ 41 million on the sale of the company in 2020.
UNB started on a depressed note under Delta control as it was affected by South Africa’s ban on the sale of alcohol, which was part of the Covid-19 lockdown restrictions that went into effect in March 2020. UNB manufactures alcoholic and non-alcoholic beverages made from sorghum. The company’s main sorghum beer brands are Chibuku, Ijuba, Leopard and Tlokwe. The brewer also makes non-alcoholic sorghum drinks under the Mageu and City Jive brands.
The acquisition of UNB expands Delta’s presence in South Africa. Southern Africa’s economy is one of the continent’s biggest consumers of alcohol. According to Statista, the country is ranked third in Africa after Nigeria and Eswatini, with a per capita alcohol consumption of 9.3 liters.
Global per capita alcohol consumption, by comparison, was 6.2 liters in 2018. In a World Health Organization report on South Africa, beer accounted for the largest share of alcohol consumption. alcohol (56%), followed by wines and spirits with 18% each. The other types of alcohol (fortified wines, rice wine, palm wine and other fermented drinks made from bananas, sorghum, millet or corn) made up the remaining 8%.
The sorghum beer market in South Africa has three main players, namely UNB, Awethu Breweries and King Food Corporation of Tiger Brands. UNB is estimated to have a market share of around 90%, with the remaining competitors accounting for the remaining 10%. The sorghum beer market, however, is struggling to grow as consumer preferences shift from opaque beer brands to clear beer brands. This is evidenced by the increase in per capita consumption of clear beer and a corresponding decline in per capita consumption of traditional beer in South Africa between 1961 and 2016.
In addition, the prices of traditional beer have remained constant at 0.0782 / liter since 2013, while other alcoholic beverages have seen significant price growth during the same period. According to statistics from the South African Wine Industry (SAWIS), wine prices increased on average by 78% and spirits by 87% on average between 2013 and 2021.
Based on these trends in the alcoholic beverage markets in South Africa, the opaque beer market is slowly shrinking and we believe the growth potential of UNB is limited as a local demand driven operation. .
However, the acquisition has many more benefits as an additional base of operations for the Chibuku brand in the sub-Saharan Africa region and beyond.
The main advantage of the acquisition is Delta’s production capacity in a relatively stable country from a macroeconomic point of view. Currently, Delta operates in Zimbabwe and Zambia, which have faced significant economic challenges. While Zimbabwe’s macroeconomic environment has stabilized somewhat, the volatile policies of the economy since 2018 have dealt Delta a heavy blow.
Zambia is currently weighed down by external debt which has caused its currency to depreciate for two consecutive years. The acquisition of UNB therefore serves Delta as an additional base of operations on which the company can count.
The alcoholic beverage market in South Africa has proven to be an integral part of the economy after the outcry following President Cyril Ramaphosa’s ban on the sale of alcohol in 2020.
The alcohol industry also released a report detailing the 52 billion rand losses the economy suffered as a result of the alcohol ban last year. In addition, South Africa has one of the best environments for doing business in Africa.
The economy is ranked 84th on the World Bank’s Ease of Doing Business Index and lags behind Kenya (13th), Rwanda (38th) and Mauritius (56th) on the African continent. In comparison, Zambia is ranked 85th and Zimbabwe is ranked 140th out of 190 countries.
That bodes well with Delta’s Chibuku Super, a carbonated version of sorghum with a longer shelf life than the original beer’s shelf life of four to six days. With a longer shelf life, Delta can comfortably produce in South Africa and export to target markets like Botswana and Malawi.
Given that Chibuku Super has been successful in Zimbabwe, we believe the company is likely to achieve a similar result in other regional markets.
We also like the fact that Chibuku has a strong brand equity in the SSA region. The brand is established in Zimbabwe, Zambia, Botswana and Malawi. We also note that there is potential for the brand to break into other African economies that manufacture sorghum beer variants.
According to Beerandbrewing.com, Kenya has chang’aa, Botswana khadi, mead from the Central African Republic and Ethiopia aacked, katila, and tella. Uganda has tonto, mwenge, murumba, marwa, kweete and musooli, and Ghana, Nigeria and Togo have pito, burukutu, and akpeteshie.
We also reiterate the primary reason for buying Delta – to raise foreign currency that will support its operations in Zimbabwe. UNB’s foreign exchange earnings will be used to pay the brewer’s import bill in Zimbabwe and to meet its foreign currency-denominated obligations. Delta shares remain lucrative on the Zimbabwe Stock Exchange. The meter is trading at a price-to-earnings ratio of 17.4x, which is undemanding compared to a regional average of 26.1x (including East African breweries, Nigerian breweries, Guinness Nigeria, Tanzanian breweries and Zambian breweries).
Mtutu is a Research Analyst at Morgan & Co. He can be reached at +263 774 795 854 or [email protected]