15 December 2023

Strongbow in South Africa: How to value a license

South Africa | When Heineken divested the Strongbow licence in perpetuity at the behest of the regulators, no financial details were disclosed. This has not stopped pundits from wondering how much the buyer – Cider House Investments – would have had to fork out for the licence.

Putting a price tag on a business for sale is an art not a science. In this case, matters are made more complicated by the fact that the business for sale is only a licence for a brand, which will be limited to certain markets, rather than full control. Usually, a value is established on the basis of the brand’s recent annual profits times x.

Lots of metrics to consider

However, determining the “x” – the profit multiple - is dependent on several metrics, including: What is the brand’s growth profile? Can it be expected to hike sales for years to come? How is the category itself evolving? Is it still growing or approaching stagnation? Besides, how many competitors are there? Is the category fairly consolidated, or do newcomers stand a chance of disrupting the incumbents’ businesses?

To better gauge the “x”, analysts will also look for precedents. Are there any transactions in the industry for comparison?

Any deals to go by?

To start with the latter: There are few precedents. Only two come to mind: One is the sale of the Modelo licence to Constellation Brands for the US market in 2013, which had been forced by the US regulators onto AB-InBev and Grupo Modelo. The multiple was some 9 times profits. However, Constellation was awarded a brewery in Mexico too.

The other transaction dates back even further. In 2006, the Australian Foster’s Group sold the European licence to the Foster’s brand to UK brewer Scottish & Newcastle. The profit multiple was 3.5, as this was a fire sale. Foster’s foray into wine had proven costly and the group was in desperate need of cash. On top of that, S&N had held the Foster’s licence for years and was the only logical buyer.

However, the most relevant comparable transaction multiple is Heineken’s own acquisition of drinks group Distell in 2021. The reported multiple of that transaction was 3.

The theory

It is true that the Strongbow brand has performed spectacularly well in South Africa. It had only been introduced in 2016 and had managed to reach annual sales of more than 700,000 hl before the pandemic. Covid seems to have dented sales for a few years. But Strongbow has since returned to growth and is expected to hit sales in excess of 700,000 hl in 2023.

Drawing upon these comparisons, the Strongbow licence could have been valued at between 3 and 9 times profits. Based on Strongbow’s disclosed 2021 profit of USD 11 million (according to the Distell prospectus), the transaction value of the licence would have ranged between USD 30 million and USD 100 million.

That’s the theory. Alas, it ignores the buyer’s bargaining skills (potentially superb), and Heineken’s willingness to award the licence to one particular buyer with credentials of “historically disadvantaged persons, HDPs” (potentially high).

Reality steps in

This is to say that the transaction multiple could have been lower than 3. After all, Heineken was motivated to buy a better market position through the takeover of Distell’s Savanna and Hunter’s ciders. In effect, it volunteered to give up the licence to its own brand, Strongbow, rather than the licence to either Savanna or Hunter’s. It should not be ruled out that the South African government chipped in some subsidies and granted tax concessions to sweeten the deal for Heineken and the HDP buyer Cider House.

Still, the buyer will need to build a production plant for Strongbow in South Africa with an estimated annual capacity of some 1.5 million hl. Even if most of the equipment is sourced from India and China, the cost will be between USD 40 million and USD 50 million, observers say.

Investment horizon

By rule of thumb, investors in South Africa hope to recoup their initial outlay after five years. The general situation is far from rosy: unemployment has shot up to 50 percent, corruption and crime are rife. Not enough, the frequent power outages represent an additional nuisance and cost for businesses.

All this suggests that if the buyer’s investment horizon and cost for the brewery are factored in, the Strongbow licence cannot have fetched more than USD 20 million, analysts say. But under the circumstances, Heineken should consider itself lucky that it has managed to fulfil the regulators’ conditions completely.

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