Distilleries acquire Heineken’s SL business for over Rs. 4 bn.

Distilleries Company of Sri Lanka PLC (DCSL) has concluded a major acquisition of the Sri Lanka operation of Heineken, a major player in the global beer industry at a consideration of Euro 12 million, (over Rs. 4.2 billion), DCSL announced last week in a stock exchange filing.

This will bring the Harry Jayawardena company, the lead player in the country’s alcohol industry, into competition with Lion Brewery PLC which dominates the beer brewing and marketing industry at present. In an earlier era, the Ceylon Brewery, now Ceylon Beverage Holdings PLC, led the beer market share with its Lion beer with Three Coins, manufactured by McCallum Brewery, trailing behind.

This brings a deal which was in the pipeline since mid-November last year, as disclosed by DCSL in a stock exchange filing, to finality. Fitch ratings said last November when news of the pending transaction broke that Lion could face more competition in the medium term once the deal was done.

“Heineken is a distant second in Sri Lanka’s beer market for now, but we believe DIST has the industry know-how, market access and financial strength to elevate Heineken’s operations to a level that could weigh on Lion’s market share,” Fitch said.

“We believe a large capacity expansion at Heineken Lanka would be required to compete effectively with Lion. We estimate the expansion will require significant capital outlay and at least two-to-three years to complete. We believe DIST has the financial strength to fund the expansion, with its annual free cash flow, excluding dividends, averaging LKR10 billion-12 billion. DIST, as the largest spirits manufacturer in the country, already has extensive market access covering all forms of retail channels, providing easy market penetration compared with a new entrant,” Fitch said.

“However, we expect DIST to face near-term challenges in terms of brand building given the complete ban on media advertising on alcoholic beverages by the government. Lion already has a very strong brand presence in the market compared with Heineken due to the greater mass-market appeal of its products, with cheaper pricing and customization to local preferences.”

Fitch expected the acquisition to be positive for DIST as it will help the company to strengthen its market position with a presence in both hard and soft liquor markets. The acquisition will also allow DIST to take advantage of the lower excise duties applicable to beer on an alcohol-equivalent basis.

There has been a shift to beer from hard liquor in recent months due to the significant increase in excise duties. DIST could also benefit from the revival in Sri Lanka’s tourism industry, as beer is more popular among tourists than locally made hard liquor, the rating agency said.