Hot on the heels of AmBev making a bid to buy Barbados-based Banks Holdings Ltd, which will also have some implications for Banks DIH Ltd in Guyana, we now have Heineken preparing to complete a take-over of Jamaican-based Desnoes & Geddes Ltd.
As take-over activity in the Caribbean beer market heats up, how will traditional regional brands like Red Stripe, Banks and even locally-based Carib (in which Heineken holds a 20 per cent stake) fare under the new ownership arrangements?
Perhaps, that question might best be answered by a beverage marketing expert?
Let us first start by reviewing the results for Desnoes and Geddes for its fiscal year ended June 2015.
Changes in financial position
Total assets less current liabilities rose to J$10.99 billion from J$9.63 billion as at June 2014.
Long-term assets advanced from J$7.61 billion to J$8.86 billion as at June 2015. The lone declining component, investment in joint venture, contracted to J$86.7 million from last year's J$181 million. This reduction reflects the proportionate loss of J$94.3 million from its 50 percent joint venture, Celebration Brands Ltd (CBL).
Investment properties moved from J$889.6 million to J$943.3 million; this mostly reflected fair value gains of J$53.7 million.
Property, plant, and equipment advanced to J$6.63 billion from J$5.5 billion. The major addition for the current period was in returnable packaging, which consumed J$1.06 billion.
Employee benefits asset for its defined benefit pension plant rose to J$1.2 billion from J$1.05 billion. This improvement reflects the higher fair value of the plan's assets (J$6.85 billion compared with 2014's J$6.13 billion); this growth was helped as the return on the plan's assets improved to 15 per cent from nine per cent.
Total current assets increased by 2 per cent to J$4.73 billion from last period's J$4.64 billion.
The only declining component, cash and cash equivalents, fell to J$1.37 billion from J$1.79 billion in June 2014. Much of this reduction related to higher purchases of property, plant and equipment (2015: J$2.05 billion; 2014: J$1.72 billion) combined with the absence of any proceeds from the disposals of investments (2014: J$956.3 million).
Accounts receivable advanced to J$1.74 billion from J$1.37 billion. This increase was mainly reflected in the trade receivable component, which climbed to J$1.7 billion from J$1.2 billion.
Despite almost 14 per cent higher sales, inventories increased marginally to J$1.15 billion from J$1.08 billion (or by about 1.07 per cent).
Total current liabilities fell to J$2.6 billion from J$2.62 billion. Both taxation payable and sums due to fellow subsidiaries declined.
The major component, accounts payable, increased by J$98.3 million pushing the closing balance to J$2.11 billion; this was 4.9 per cent greater than 2014's J$2.01 billion. Notably, trade payables fell to J$822.6 million from J$959 million. In contrast, other payables climbed to J$426.3 million from the previous level of J$162.6 million.
Total long-term liabilities moved to J$665 million from J$618 million. This represented employee benefits obligations of J$138 million (2014: J$142 million) and deferred tax liabilities of J$527 million (2014: J$476.1 million).
Equity changes
Total shareholders' equity advanced to J$10.33 billion from last year's J$9.01 billion.
Other reserves moved to J$796.6 million from J$678 million. This represents net employee benefits assets of J$1.06 billion less deferred taxes of J$265.5 million.
The major increase was concentrated in the retained earnings component, which climbed to J$6.98 billion from the previous year-end's J$5.78 billion. Here, the main movements were the current year's profit of J$2.33 billion reduced by dividends to shareholders of J$1.12 billion.
With 2,809,170,386 shares outstanding, each share had a book value of J$3.68 (2014: J$3.21).
Revenues and profit
Excluding consumption tax, net 2015 sales registered at J$13.09 billion; this was 13.8 per cent greater than the J$11.5 billion recorded for 2014.
The cost of sales climbed by only 12.5 per cent to reach J$7.63 billion from the previous level of J$6.78 billion.
These favourable changes saw gross profit improve by 15.7 per cent to reach J$5.46 billion from J$4.72 billion for the 2014 period.
However, marketing costs climbed by 36.5 per cent to reach J$1.37 billion from last year's J$1 billion. This change restrained profits to J$4.09 billion from the J$3.72 billion earned in 2014.
General, selling and administration expenses increased to J$1.26 billion; this was marginally greater than 2014's J$1.22 billion. Meanwhile, other net income fell to J$155.5 million from J$232 million last year.
In line with lower cash balances, interest income fell to J$19.4 million from J$24 million.
D&G also incurred losses on its CBL joint venture of J$94.3 million, a loss on disposal of property of J$70.4 million and had net pension and medical benefits expenses of J$8.1 million.
These movements helped D&G produce a pre-tax profit of J$2.83 billion. This compares unfavourably with a pre-tax 2014 profit of J$3.83 billion.
In 2014, two special factors contributed to the higher result; first, there was J$155.1 million relating to a gain on settlement of intra-group balances upon liquidation of subsidiaries and then there was a gain on disposal of investments of J$973.7 million.
During 2014, D&G Ltd sold its 5 per cent stake in Brasserie Nationale d'Haiti, valued at J$487.9 million and its 10 per cent shareholding in Windward and Leeward Brewery Ltd, valued at J$472.7 million. The disposal of these two investments on December 19, 2013 to Heineken generated a one-time profit of J$973.7 million for the company.
After taxes, the 2015 net profit registered at J$2.33 billion compared with J$3.31 billion. These results translate into EPS of J$0.83 for 2015 versus J$1.12 for 2014.
Divisional performance
Although domestic sales increased by 13.5 per cent segment profit advanced by only 6.2 per cent. Local sales were helped by brand extensions, such as Red Stripe Sorrel and Lemon Paradise.
In contrast, export sales rose by 15.3 per cent and delivered a profit improvement of 24.3 per cent. Exports were driven by improved sales of its flagship brand, Red Stripe.
The company is pledged to increase its use of local raw materials to 40 per cent by 2020. One example is by using local Cassava to replace imported high maltose corn syrup.
Although exports are growing, more than 84 per cent of its sales (both in 2014 and 2015) are still made in its home market, Jamaica.
Dividends and share price
In line with its lower profits, D&G reduced its annual dividend to J$0.40 from J$0.50 paid for the 2014 fiscal period.
D&G's price closed at J$7.55 on June 30, 2015. Relating the current year's dividend to that price gave investors a yield of 5.3 per cent.
After a quiet few months, the share price surged to J$13.07 on October 9, 2015 when 29,094,681 shares changed hands.
This upward movement continued with the price closing on October 12, 2015 at J$15.03 and then jumped to J$25.03 on October 14, and then further climbed to J$29.63 on October 16, 2015.
Much of the reasons for these positive price changes are explained in the following section.
Recent ownership changes and prospects
Desnoes & Geddes Ltd released the following announcement on October 8, 2015:
"Desnoes & Geddes Ltd was advised yesterday October 7, 2015, that Heineken acquired a controlling stake in Desnoes & Geddes Ltd by acquiring the entire issued capital of Udiam Holdings AB, a subsidiary of Diageo plc for the sum of US$420,990,826.00. Udiam owns 1,625,549,827 shares in D&G which constitutes 57.8 per cent of the share capital of D&G. Prior to the acquisition, another subsidiary of Heineken already owned 434,033,141 D&G shares which constitutes approximately 15.45 per cent of the share capital of D&G Following the acquisition, Heineken indirectly owns 73.32 per cent of the share capital of D&G."
The price paid by Heineken International to Diageo for Udiam equates to US$0.259 per share; this was approximately equivalent to J$30.90. This explains why the share price has appreciated so much in recent weeks. That price equates to more than 8 times the theoretical "book value" of the company!
As a result of these changes in ownership, D&G's AGM has been rescheduled to Friday November 13, 2015 from the original date of November 3, 2015. This shift would allow for new Heineken directors to be appointed and elected.
Subsequently, it is expected that Udiam, on behalf of Heineken, will make a formal offer to the other shareholders for the remainder of the company.
It is entirely possible that the final price for the remaining shares in D&G could be higher than that paid by Heineken or even the most recent trade on the Jamaican Stock Exchange.
Having sold Lascelles de Mercado, first to CL Financial/Angostura and then on to Campari and now, very likely, D&G to Udiam/Heineken, what is the state of ownership of the spirits market in Jamaica?
Closer to home, we are also in the process of seeing the possible sale of Banks Holdings Barbados to AmBev. However, last Tuesday, ANSA McAL Ltd, 80 per cent owners of Carib Brewery, decided to enter the bidding for BHL by making an offer of B$5.20 per share for "all" of the company.
That development might have complications for Massy Holdings, which, in September, sold its large stake in BHL for "only" B$4 per share. Could it be argued that it was too hasty to sell those shares in order to boost its bottom line for its September 2015 year-end? Let us see what transpires in the coming weeks.
Is this the start of the realignment of ownership interests in the spirits businesses across the region? Perhaps, there is a bigger story here?