Diageo fully takes over a sorghum beer brewer

Funny that no one asked the question why Diageo should want to invest in sorghum beer in South Africa? Until recently, few Diageo watchers would have thought that premium spirits brands and a cheap traditional beer go together well. Besides, South Africa’s beer behemoth SAB exited the category 15 years ago, probably thinking that there was not much in it for them.

Perhaps Diageo was compelled to clinch the deal as part of its larger dealings with India’s liquor king Vijay Mallya?

In early April 2015, UK drinks group Diageo picked up another piece of the empire of Indian liquor baron Vijay Mallya when it entered an agreement to buy the remaining 50 percent interest in United National Breweries’ traditional sorghum beer business in South Africa.

Diageo paid USD 22 million for a 50 percent stake of United National Breweries (UNB). It has also agreed to pay a further USD 14 million should the group meet a certain future earnings target.

Diageo first invested in UNB two years ago, when it reportedly paid USD 36 million to buy half the company, with the other half owned by Pestello Investments, a group connected with Mr Mallya.

The world’s number one drinks group has stealthily moved in on the assets of Mr Mallya, whose father founded Kingfisher Beer. Its dealings with Mr Mallya date back to 2008, when it first attempted to acquire the Indian drinks giant but failed to reach an agreement over price.

It finally gained a majority control over United Spirits last year, having amassed a 55 percent stake.

Though active in the South African market through Brandhouse, a three-party marketing and distribution venture with Heineken and Namibia Breweries, Diageo did not say if UNB will continue to be run independently from Brandhouse. Heineken and Diageo also jointly own a brewery in Sedibeng, near Johannesburg.

Whatever Diageo’s reasoning for taking over UNB, the outlay for the sorghum brewer is not huge, totalling an estimated USD 58 million. This is roughly the kind of money AB-InBev have spent on a U.S. craft brewer or two. If this allows Diageo to explore the sorghum beer market in Africa, so be it.

According to market research company Euromonitor, South African Breweries (SAB) dominated the total beer category (sorghum and clear beer) in South Africa in 2013, accounting for a 79 percent share. UNB ranked second with an 11 percent share (which corresponds to an estimated 3.8 million hl beer), seeing a slight increase from 2012. Brandhouse Breweries came third with a 7 percent share, slightly down from its share of 8 percent in 2011.