EABL Undervalued In Diageo Deal

British multinational Diageo Plc’s proposed purchase of additional shares in East African Breweries Limited (EABL) values the company at Ksh151 billion, signaling an undervaluation of the brewer at the prevailing market price prior to the announcement.

Diageo Plc, which is listed on the London Stock Exchange, said in a notice on Friday that it is seeking to raise its stake in EABL, which is held through a wholly owned subsidiary known as Diageo Kenya, from 50.03 percent to 65 percent, through the purchase of an additional 118.39 million shares in the company at a price of Ksh192 a share.

Diageo Kenya, which holds 395.6 million shares in EABL, will pay Ksh22.7 billion for the additional stake, whose purchase it expects to conduct in two phases between January 30, 2023, and February 7, 2023, and February 20 and March 10, 2023.

The EABL share price stood at Ksh138 on Thursday, the last trading session before the Diageo offer was disclosed, which valued the company at Ksh109.1 billion. Meaning that Diageo’s offer price represents a premium of more than Ksh42 billion on EABL’s pre-disclosure valuation.

In Friday’s trading, the share price rallied by 23 percent to Ksh170, valuing the brewer at Ksh134.4 billion because of the announcement, which also meant a removal of the daily 10 percent cap on share price movement at the Nairobi Securities Exchange (NSE) on the day.

“The tender price represents a premium to the Volume Weighted Average Price (VWAP) at which shares of EABL traded on the NSE days up to October 12 of 31.4 percent to the last 30 days VWAP; 42.5 percent to the last 90 days VWAP and a premium of 33.5 percent to the last 180 days VWAP,” said Diageo in its notice.

The willingness by Diageo to offer a steep premium on the EABL shares indicates that the firm sees undervaluation on the stock, but also an intention to take advantage of the prevailing lower prices at the NSE to strengthen its hold on the brewer.

EABL has been one of the most profitable listed companies in Kenya, offering a stable dividend policy due to the maturity of its business in terms of capital investments.

The brewer doubled its net profit to Ksh15.57 billion in the full year ended June 2022, helped by increased sales, allowing it to pay a full year dividend of Ksh11 per share.