SABMiller to buy majority stake in Pabod Breweries

Looks like the Nigerian beer market is going to witness some real action in the months to come. On 27 November 2008 it was announced that the world’s number two brewer SABMiller has entered into agreement to acquire a majority stake in the recently resuscitated Port Harcourt-based Pabod Breweries. The days of Nigeria’s beer duopoly seem truly over. Now Heineken und Guinness have to face competition from both SABMiller and the Castel Group.

What a year it was for Pabod Breweries. Having lied dormant for more than a decade, the Rivers State government and Germany’s consultancy Brewtech worked out a plan as to how to re-start Pabod Breweries again. Unfortunately, theirs was a shoestring budget. They had enough funds to kit out the brewery but not enough to run an expensive marketing campaign. That campaign was to be financed by incoming revenues once Pabod’s Grand Lager beer hit the market.

Alas, all this fell through when Pabod’s national competitor Nigerian Breweries Ltd., in which Heineken holds the biggest stake, took Pabod to court on the claim that Pabod’s customised beer bottle looked like NBL’s Star bottle. This being Nigeria, the court case has dragged on and on, preventing Pabod from fully launching its product range.

On 30 June 2008, after months of adjournments, Pabod was victorious for the first time. Pabod managed to convince the court that it had not infringed upon the trademark design of the Star bottle. However, NBL being determined to frustrate Pabod’s marketing effort, decided to appeal the decision of the Federal High Court. That case is still pending. If NBL fails to make its case again, it will have to pay compensation to Pabod. Pabod is certain that justice will prevail in the end.

Alas, until then it cannot do very much. The situation forces Pabod to focus on its malt beverage Grand Malt and package its beer in Nigeria’s generic beer bottle. This is a quick fix but not a long-term solution to Pabod’s problems as the generic beer bottle does not enjoy a premium image.

While Pabod’s products have attracted commendable acceptance, sales are still very slow and the company is far from reaching a break-even point.

The reason for this slow start is attributable to the stiff competition on the market, which demands that to break-in, a huge marketing budget is required. Another reason behind Pabod’s low sales, explains Pabod’s Chairman Christopher Briggs, is the introduction of the non-returnable can into the market. This has affected sales in returnable bottles. Unfortunately, he says, Pabod’s finances do not allow the brewer to install a canning line in its plant at present.

To meet the challenges on the market with respect to packaging, it is the plan of Pabod’s Board to install in the immediate future a canning line and in the medium term a water bottling line. It is also the plan of the Board to place an order for more bottles and crates as the current stock cannot carry full operation. Furthermore, Pabod is in dire need of new of sales vehicles, which given Nigeria’s bad road conditions, cannot withstand the stress for long.

Owing to the obstacles placed in Pabod’s way by NBL, all its marketing and advertisement programmes were rendered redundant and useless, notwithstanding that a lot of funds have been committed to the programme. Currently, there is absolutely no advertisement of Pabod’s products nor does Pabod have any Point of Sales materials. Pabod is also not doing any promotion for the products. This situation has severely affected its sales.

The Rivers State Government as the majority shareholder has done a lot towards the reactivation and the eventual return to operations of Pabod. To date, the Government has raised an unsecured term loan of NGN 1.0 billion (EUR 6.7 million) in 2007 and another NGN 250 million (EUR 1.6 million) loan in July this year.

Although the Rivers State Government has been instrumental in bringing Pabod back to life, it knew very well that it had to exit the company once an outside investor had been found. In recent months, the Rivers State Government and Brewtech, the management partners, have been able to broker an arrangement whereby Brewtech will pull out of the project and give room to another investor to whom both the Rivers State Government and Brewtech will transfer some of their shares. In this arrangement, Strategic Alliance JV 2, a subsidiary of SABMiller, will acquire the shares of Brewtech as well as some of the shares of the Rivers State Government and participate in a share capital increase such that it will hold the majority shareholding in the company.

As borrowing from banks has become suicidal in view of the very high interest rates, the Board has considered it appropriate to increase the Authorised Share Capital from the current NGN 600 million to NGN 1.6 billion. When this increase is approved, the Board will be able to raise fresh capital with it for the operations of the company.

On Pabod’s new board SABMiller will have five seats, the Rivers State government two, the Bayelsa State one, and all others also one.

For SABMiller, buying into Pabod Breweries represents a market entry through the back door. SABMiller has been eying up Africa’s second largest beer market for many years but for reasons it kept to itself SABMiller has refrained from opting for a green-field site solution.

In another significant diversion from its business principles, SABMiller has now accepted a deal which will not make it the sole owner of a brewery. SABMiller has never been happy with governments sitting on its boards for the obvious reason that governments have different agendas to businesses when it comes to running a company. However, Nigeria’s growth prospects and the size of the market seem to have convinced SABMiller’s executives that a pragmatic approach was called for.

SABMiller may have chosen to be pragmatic, but what about Mr Castel? Although the two companies are in a joint venture in Africa, they seem to have had an agreement that they would never operate in one market in tandem. That way they would never endanger each other’s monopolies. In the case of Nigeria, this rule apparently does not apply any longer.

Readers will remember that earlier this year the Castel Group acquired the majority stake in International Breweries in Ilesha from Germany’s Warsteiner Brewery. People close to the situation say that International Breweries’minority shareholders still have to approve the deal. Even if they do, the brewery will require significant investment especially when it comes to sexing up its rather unsexy brand. Pardon my French. In other words, some precious time will be wasted before Mr Castel will be able to make a significant impact on the Nigerian beer market.

This would explain SABMiller’s willingness to invest in Nigeria. The situation at Pabod is such that SABMiller will be able to barge ahead while Castel is still sorting itself out.