Nigerian Breweries Eyes 80% Stake In Distell Wines, Spirits Nigeria Limited

Nigerian Breweries Plc has initiated a decisive move to address its financial struggles by exploring the acquisition of an 80 percent stake in Distell Wines & Spirits Nigeria Limited.

This strategic acquisition is part of a broader effort to stabilise its financial position following a recently approved N600 billion rights issue by the Nigerian Exchange Limited (NGX).

The first-half 2024 earnings report from Nigerian Breweries underscores the urgency of this capital raise, highlighting the need to restore sustainable growth, profitability, and enhance operational and financial stability. The company stated: “To restore sustainable growth and profitability and enhance operational and financial stability, the company is raising up to N600 billion in additional capital through a rights issue.”

The capital raised through this rights issue is kept for reducing both foreign exchange-denominated and local debts. By doing so, Nigerian Breweries aims to lower interest expenses, improve its interest coverage ratio, and strengthen its liquidity position. These financial improvements are expected to stabilise the company’s key financial metrics, making it more resilient to ongoing economic challenges.

Nigerian Breweries faced significant financial pressure due to the persistent dollar scarcity in Nigeria, which has resulted in substantial foreign exchange (FX) losses. In 2023, the company reported a pre-tax loss of N145.224 billion, a glaring contrast to the N17.34 billion pre-tax profit recorded in 2022. FX losses in 2023 alone amounted to N153 billion, a staggering 482 percent year-on-year increase.

The company’s financial strain was further exacerbated by a 179 percent surge in total debt to N342 billion, which weakened its balance sheet significantly. This led to retained losses of N26.3 billion and a sharp decline in shareholders’ equity from N179.9 billion in 2022 to just N63 billion by the end of 2023. The downward trend continued into 2024, with a pre-tax loss of N116.34 billion, pushing retained losses to N111.314 billion and driving shareholders’ equity into a negative position of N21.216 billion.

Despite these challenges, Nigerian Breweries has shown signs of resilience. The company recorded a 34% increase in operating profit in the first half of 2024, although foreign exchange losses and high-interest expenses continued to drive the loss for the period, which increased by 79%.

The N600 billion rights issue is expected to have a significant impact on Nigerian Breweries’ financial metrics. While the issuance of new shares may initially dilute earnings per share (EPS), the reduction in debt and interest expenses is expected to improve profitability, potentially leading to a rebound in EPS. The company’s current price-to-earnings (P/E) ratio of -2.03 could also become more favourable as profitability improves, making the stock more attractive to investors.

Additionally, the price-to-book ratio, currently at -13.03, could realign to reflect a more accurate valuation of the company, potentially driving up the stock price. The reduction in debt will also lower the company’s enterprise value (EV), and as profitability improves, the EV/EBITDA ratio could indicate that the company is undervalued, attracting more investors.

Encouraging signs of recovery are beginning to emerge for Nigerian Breweries. In its first half of 2024 report, the company reported a 73 percent increase in revenue compared to the same period in 2023, driven by strategic pricing, innovation, volume increase, and market recovery. Gross profit grew by 42 percent, although this was lower than the revenue growth rate due to a 93 percent increase in the cost of goods sold, driven by currency devaluation and inflation.

Foreign exchange losses moderated in Q2 2024, showing a 46 percent quarter-over-quarter and 44 percent year-on-year decline, reducing the loss to N39.4 billion. This moderation contributed to a 23 percent reduction in pre-tax loss in Q2 compared to Q1, signalling that the company is gradually stabilising.

For shareholders, the rights issue at the discounted price of N26.50 per share presents a strategic opportunity with the potential for long-term capital appreciation as the company stabilises and embarks on a growth trajectory. The acquisition of an 80 percent stake in Distell Wines & Spirits Nigeria Limited could further strengthen Nigerian Breweries’ market position and drive future growth.

While the company faces a challenging road ahead, the rights issue marks a critical step toward recovery. It has the potential to restore investor confidence, enhance the company’s valuation, and pave the way for a more stable and profitable future.