Not to be diluted - Distell

At the recent AGM, Capevin shareholders were told that licensing agreements involving some of the best-known global spirits brands would preclude a further collapsing of the shareholding structure.

Earlier this year Distell's pyramid control structure via Capevin Investments and Capevin Holdings was simplified with the dismantling of Capevin Investments. About R340m of value was unlocked to shareholders in the process, prompting queries about whether the next logical step was to collapse Capevin Holdings.

Capevin Holdings holds a 28,99% stake in Distell as its only investment but carries roughly a 15% discount on this holding despite all dividends passing straight through to shareholders.

Retention required

Officially, the nature of commercial arrangements to which Distell is a party, including trademark agreements, requires the retention of Capevin Holdings as the ultimate holding company of Distell. Any changes in the shareholding structure could be construed as a change of control, especially since there are three main shareholders - Remgro, SABMiller and Capevin - with roughly equal shareholdings in Distell.

At the meeting Remgro executive Lucas Verwey, who serves on the Capevin board, scotched speculation that the agreements dated back to the late 1970s when SA Breweries and Remgro called a truce in their beer wars.

"None of these licensing and trademark agreements dates back to the 1970s. These are new agreements ... but like all such deals there is a change of control condition."

Improve liquidity

Earlier in the meeting Opportune Investments director Chris Logan pressed Capevin directors on whether a further collapsing of the control structure was possible - if only as a means to improve the "very poor liquidity" in Distell.

Logan argued that improving Distell's liquidity would draw more serious investor interest, which could help place the company on the same "evolutionary path" as beer giant SABMiller.

He asked about the possibility of listing Distell on an international bourse, pointing out that SABMiller's London Stock Exchange listing provided a "currency to facilitate its international growth".

Unbundling vs acquisition

If Capevin Holdings could not be unbundled, Logan suggested the holding company acquire all the shares of Distell in the same manner that Capevin Holdings had acquired all the shares of Capevin Investments.

As an alternative, Logan proposed Distell "use its paper" to acquire all of Capevin Holdings' shares, making one point of entry for investors.

Capevin chairman Chris Otto stressed the boards of Capevin and Distell had looked at ways to simplify the structure. "But it's not always that easy . and whatever we do we must be careful to not harm the brand."

Verwey added that the processes of simplifying the shareholder structure had been exhausted for now.

Contentions that the Capevin structure is a hindrance to Distell's global ambitions could be tested in the short term, with Otto conceding that the chances of a significant local acquisition were slim. "We won't get a local deal through the competition authorities. If Distell has expansion plans, these must be international."

Otto noted, though, that an international brand took 20-30 years to establish and that buying an established international brand was expensive. "Diageo recently acquired a brand in Brazil at a 38,5 p:e. We can't overpay for an acquisition ... for a small company it is dilutive."

Distribution channels

Logan said there was an opportunity for organic growth offshore if SABMiller could provide additional distribution channels internationally - especially for Distell's cider business (the second-largest in the world by volume). Otto countered that it might be better to keep some distance with SABMiller, noting "they did not get to be the second-biggest brewer in the world by being nice guys".

But Otto hinted there were interesting offshore moves afoot at Distell, which recently secured a distribution foothold in China and already holds the Bisquit cognac brand.

He said with Remgro - which had built up global tobacco and luxury goods businesses and knew its way around international markets - as a major shareholder, "I think you might be surprised by Distell's future."

Source: Financial Mail