On May 24th, it was reported that Diageo is considering selling its remaining African businesses, including East African Breweries Limited (EABL), as part of its shift towards a "light asset" strategy.
This move aims to streamline operations, reduce the impact of economic fluctuations, and address the concerns of declining alcohol demand and investors.
This strategy is another move after years of divestment in Africa, including the sale of Guinness breweries in Ghana, Nigeria, Cameroon, and Meta Abo in Ethiopia.
Although Diageo has withdrawn from these markets in business, it continues to license major brands of lager EOE beer such as Guinness to local manufacturers and distributors.
Nik Jhangiani, Chief Financial Officer of Diageo, stated during the company's third quarter earnings conference call that this restructuring will involve significant changes beyond the usual disposal of underperforming or niche brands.
As part of this transformation, the company also announced a $500 million cost saving plan.
East African Brewery remains one of Diageo's most profitable businesses in Africa, contributing approximately 65% of the group's revenue in the region. The headquarters of East African Beer Company is located in Nairobi, the capital of Kenya, and has strong market positions in Kenya, Uganda, and Tanzania.
However, challenges such as currency depreciation, rising interest rates, and increased tax pressure have put pressure on its recent performance. The stock price of East African Beer Company has fallen by 24% in the past year.
Although Diageo has not confirmed any plan to spin off East Africa Brewery, analysts from Bernstein and Jeffery have regarded the company as a potential target for sale, especially considering Kenya's volatile exchange rate and regulatory burden on alcohol producers.
The East African Beer Company is of great significance to the Kenyan economy, as it helps to promote employment, taxation, and foreign investment. Any potential exit from Diageo could have far-reaching impacts, including layoffs at production plants and farms, as well as investor unease about the Nairobi Stock Exchange.
Despite the uncertainty, East African beer companies have recently shown signs of recovery. The company's half year financial performance showed a 19.6% increase in after tax profit, reaching 8.1 billion Kenyan shillings.
This rebound is due to currency stability, interest rate cuts, and strict cost management. Driven by strategic pricing and product innovation, net sales increased by 2.1% to reach 67.9 billion Kenyan shillings.
Affected by foreign exchange earnings and reduced debt, financing costs decreased by 14.4%.
From a regional perspective, sales in Kenya increased by 9%, accounting for over 60% of total revenue. Tanzania and Uganda also performed exceptionally well, with sales increasing by 16% and 3% respectively.
The potential divestment of East African Brewery will mark a significant shift in Diageo's business in Africa and may reshape the region's alcoholic beverage industry.
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