Gloves off as SABMiller, EABL part ways

By John Njiraini

It is probably the only high profile divorce case that has been handled with a sense of dignity.

But the decorum so far projected after the marriage of convenience between beer manufacturers East Africa Breweries Ltd (EABL) and SABMiller hit the rocks sometimes last year is headed for an abrupt end.

This follows revelations that SABMiller has served EABL with notice to terminate the two companies forced relationship in the Kenyan market, a clear indication that a second round of bruising battles over the control of the Kenyan market, and by extension the East African market, could be in the offing.

SABMiller controls a mere one per cent of the formal Kenyan beer market with EABL commanding over 75 per cent. Photo: File/Standard

The Financial Journal has established that SABMiller has written to EABL seeking to get out of Kenya Breweries Ltd (KBL) where it controls a 20 per cent stake according to an agreement entered in 2002 that saw the company close its Castle Breweries Ltd in Thika, and exit the Kenyan market.

The agreement, an outcome of a bitter rivalry between the two companies in the late 1990s, that is akin to the wars currently being witnessed in the mobile telephony industry, also resulted in EABL acquiring a 20 per cent shareholding in Tanzania Breweries Ltd (TBL), which is majority owned by SABMiller.

Under the agreement, EABL was to take over the brewing and distribution of SABMiller products in the Kenyan market while SABMiller was to do the same in Tanzania.

Over the years, this relationship proved ineffective as both companies engaged in accusations and counter-accusations for failing to promote each other’s products in the respective territories.

This resulted in EABL instigating a surprise move on SABMiller that involved acquisition of a controlling stake in Serengeti Breweries Ltd (SBL) in Tanzania, terminating the distribution agreement with TBL and making it clear that its future in that market lied with SBL.

Already, the company, majority owned by Diageo Plc, has secured the necessary approvals from the Tanzanian Fair Competition Commission (FCC) to acquire 51 per cent of SBL.

But now SABMiller has decided to retaliate after telling EABL it wants out of KBL in preparation for what observers contend is a strategy to re-enter the Kenyan market using a different route.

“I can confirm that SABMiller has written to EABL seeking to exit KBL so that they can develop a new strategy for Kenya,” said a source privy to the notice on condition of anonymity.

Silent war

But as it has now become the norm, the two companies opted for silence on the matter. Speaking on phone from London, SABMiller Head of Media Relations Nigel Fairbrass said the company cannot confirm or deny the issue.

“I cannot talk about that issue, sorry,” he told Financial Journal.

EABL also opted for silence, only saying its deals are strictly confidential.

“The terms and status of all our commercial arrangements are confidential,” said Brenda Mbathi, the external affairs and communication director.

While both companies prefer to play their cards close to their hearts, there is no denying SABMiller has been busy exploring strategies to increase its market share in Africa besides trying to crack a complex puzzle of how to re-enter the Kenyan market.

Over the past one year alone, the company sent emissaries in Kenya who have met local opinion leaders, government officials and most importantly, top management of EABL’s competitors.

“Our presence in the Kenyan market is extremely small but there is nothing we can do because we have a contract with EABL who distribute our products,” Fairbrass told this writer during a visit to Kenya late last year.

Yet even as SABMiller mulls over the best strategy to take on EABL in the Kenyan market, which could either involve setting up a whole new operation or entry through acquiring an already existing beer manufacturer, there is no doubt the decision to exit KBL would be strategic.

Market leader

This is because it ultimately frees the company to craft a new course for the Kenyan market away from the chains of EABL, something that allows it room to unleash its financial muscles to wrestle the grip of the local market from EABL.

SABMiller products, with the flagship Castle Lager, control a mere one per cent of the formal Kenyan beer market with EABL commanding over 75 per cent.

The rest is shared among Keroche Industries Ltd, Ozzbeco Ltd, which brews Sierra range of alcohol and Maxam Ltd, which distributes Heineken beer.

Already, SABMiller, in its true characteristic of opaqueness, has made know its intention of becoming the largest global beer manufacturer in Africa, a move that would overshadow giant manufacturers Diageo and Heineken.

Reports indicate the company, which has its roots in South Africa and is listed in the London Stock Exchange, is in negotiations to acquire Castel’s African beer operations in a deal estimated at $9.5 billion.

Though currently, the two companies have a strong bond, if the deal goes through it would significantly increase SABMiller’s presence in the continent.

Closer to Kenya, SABMiller is aggressively shaking the ground on which EABL stands, something that is causing discomfort in London and Ruaraka.

In Southern Sudan, for instance, the company has tightened its grip on the control of the market after it commenced production of White Bull Lager through its subsidiary, Southern Sudan Beverages last year.

And just two months ago, the company announced plans to double output in Southern Sudan by the end of the year from the current 180,000 hectolitres to 350,000 hectolitres.

In contrast, EABL’s performance in Southern Sudan has not been impressive.

According to the company’s 2009/10 financial results, Southern Sudan posted a 14 per cent decline in volumes.

While EABL can endure the burden of battling with SABMiller for control of markets outside Kenya and even accept to play second fiddle, one thing is with no doubt — the company is hell bent to protect its leadership of the Kenyan market.

Granted, EABL’s top management has repeatedly stated the company is not perturbed by the prospect of SABMiller making a re-entry to the Kenyan market.

Ready for competition

“We are ready for SABMiller if they come back to Kenya. We welcome competition,” said EABL Group Managing Director Seni Adetu in an early interview.

Despite all these statements, the Kenyan market remains the cornerstone of EABL’s business and the driver of its impressive growth over the years.

In the 2009/10 financial year, the company posted an impressive profit before tax of 30 per cent compared to Uganda where operating profit declined by 51 per cent.