Shareholders set to decide on Nigerian Breweries – Consolidated Breweries’ merger

Come 4th December 2014, shareholders of Nigerian Breweries plc and Consolidated Breweries Limited, will be headed for separate court-ordered meetings to decide on a proposal to combine the operations of the two companies into a single legal entity. This will be effected through a scheme of merger in which the surviving entity will be Nigerian Breweries.

Heineken NV is the majority shareholder in both companies but has decided not to vote at the meetings in order to give the minority shareholders of both companies sole discretion as to whether or not to approve the proposed merger.

The boards of both companies have taken a decision to merge in the best interest of the businesses, their brands and their employees. The proposal to merge requires the approval of 75 percent of the shareholders of the two companies present and voting in their separate meetings.

The purpose of the merger is to provide an opportunity for the two companies to align their long-term strategic interests with a view to enhancing operational efficiency and ultimately maximising value for all stakeholders.

The targets are to reduce overheads and enhance shareholder value through the exploitation of various operational synergies. This is expected to result in improved revenues, cost savings and operational efficiencies in the enlarged Nigerian Breweries.

The post merger entity is being positioned to manufacture products of both companies with improved efficiently through their combined operational capacities. Products will also be sold and distributed across the combined sales and distribution networks of the two companies.

Investors and other stakeholders in the merging companies expect to reap benefits from five broad areas. One is operational efficiencies, as the combination of the operations of both companies is expected to result in economies of scale and create synergies. With increased efficiency, significant cost savings are targeted in the areas of procurement, supply chain management and support functions. This will expectedly lead to improved profit margin and therefore an increase in the value to shareholders.

The second area is easier access to debt and equity capital at favourable terms. This has become an important area of interest, as high cost of funds has continued to erode profit margins of companies generally and hinder profit growth.

Nigerian Breweries paid about N7.5bn interest expenses in 2013 and a 21 percent rise in interest charges in 2013 accounted largely for a drop of over 65 percent in the after tax profit of Consolidated Breweries in the year. The companies will now have an opportunity to apply a common approach in managing internally generated cash and in securing external funds.

Improved liquidity of investments is another area of benefit, as the shares of Consolidated Breweries, when reissued by Nigerian Breweries, will become tradable on the floor of the Nigerian Stock Exchange. Nigerian Breweries’ shares rank among the most liquid instruments traded on the Nigerian Stock Exchange.

By far one of the most exciting benefits anticipated from the merger is increased momentum in creating value for shareholders. Significant cost savings are expected to be achieved in respect of finance cost, distribution/administrative among others.

Economy of scale expected from the merger as well as important synergies to be created are considered big enough to improve profit margin and spur rapid growth of the bottom line. Arrangements have been put in place for shareholders unwilling to be part of the enlarged company to be paid N120 per share.

To the traded equities market, the proposed merger will be extending the benefit of increased market capitalisation. Nigerian Breweries will be issuing 396,857,294 ordinary shares of 50 kobo each in exchange for 496,071,617 ordinary shares of Consolidated Breweries at a ratio of four new shares for every five held. This will raise the volume of shares for Nigerian Breweries to approximately 7,960 million and therefore its market capitalisation.

Both companies have demonstrated adequate strengths to grow revenue and maintain profitable operations over the past five years. Except for a flat growth in 2012, Nigerian Breweries has grown after tax profit every year in the past five years from N27.9bn in 2009 to a peak of N43.08bn at the end of 2013.

The Company achieved an accelerated growth in profit last year from both improvement in sales revenue and a gain in net profit margin. It has improved further upon those advantages in the current year as per its latest interim report.

Consolidated Breweries has also maintained profitable operations in the past five years. It grew after tax profit from N2.79bn in 2009 to a peak of about N3.22bn in 2012. It closed 2013 operations with a drop in after tax profit to N1.12bn, which followed rapid increases in finance cost and cost of sales.

The proposed merger between the two companies therefore presents an opportunity to reinforce their areas of strengths and smoothen out areas of operating weaknesses. The move appears to be a win-win situation for the brewing companies, their investors, employees and customers.

HOPE MOSES-ASHIKE