September 19, (THEWILL) – Nigeria’s major Fast-Moving Consumer Goods (FMCG) firms listed on The Exchange recorded significantly impressive performances in their half year (H1 2021) operations and the results were far beyond industry expectations. But Guinness Nigeria Plc, a subsidiary of Diageo and a key player in that sector, is not among them, as the company’s annual report for the year, which ended on June 30, 2021, has shown.
In the past five years, the brewing giant has been battling severe operational and environmental challenges emanating from its internal dynamics and those created by extraneous circumstances beyond its control. But most of the shareholders who interacted with THEWILL expressed optimism that the over two centuries-old firm, operating in over 50 countries and available in over 120, is still strong enough to weather the storm. However, they still nurse the injuries sustained in what they call a ‘baffling deal’ by the company about five years ago.
The company’s 2021 annual report shows moderate improvement in key fundamentals, compared to last year’s result. Analysts have used the firm’s 110 per cent rise in profit after tax (PAT) to N1.25 billion from the loss of a whopping sum of N12.57 billion in 2020 in their banner headlines, yet the numbers show prospects of a firm that must go the extra mile to return close to the comfort zone it once occupied when it declared a dividend of N1,000 per share (in 2011). The 54 per cent revenue increase to N160.41 billion from N104.37 billion in 2020 has a flipside in the 246 per cent jump in the cost of sales, which leapt to N114.70 billion from N71.04 billion in the preceding year.
The fate of marketing and distribution expenses also deteriorated during the period as the firm witnessed a rise from N18.51 billion in 2020 to N26.06 billion in 2021.
EVENTS OF 2016
Guinness Nigeria recorded a loss of N2.015 billion in 2016, the first loss in 30 years, due to several factors that militate against the company that year. This ranged from Nigeria’s worst recession in 25 years to the sharp devaluation of the naira. These are inexorably linked to the purchasing power of the consumers whose response was as expected – a drop in patronage.
But the company also had a serious challenge with the investing public, following what shareholders called a “baffling deal”. Guinness Overseas Limited, Diageo, the parent company had in September 2015 informed the Nigerian Stock Exchange of its intention to make an offer to increase Diageo’s equity stake in Guinness Nigeria from 54.3 per cent to a maximum of 70 per cent.
The excited local investors and traders ‘plunged’ into the company’s stock and invested heavily in it. The rush pushed the share price from about N125 before the announcement to a peak of about N160. By the terms of the offer, Diageo was to launch a partial tender offer at a price not higher than N175 per share in cash to acquire up to 236,176,604 ordinary shares in Guinness Nigeria.
The offer gave Nigerian shareholders willing to sell their shares in Guinness at a significantly higher than market price an opportunity to do so. The offer price at the time represented a premium of 40 percent in the closing share price of Guinness Nigeria on Tuesday September 8, 2015, the day the announcement was made. The total value of the transactions at the intended offer price was approximately N41.3 billion. Guinness Nigeria then had 1,505,888,188 ordinary shares in issue.
Investors and traders took advantage of the premium and invested heavily in Guinness stock at the time with the intention of offloading their stock during the tender offer, which was expected to happen soon. However, the ‘soon’ became 15 months of silence, distributing massive losses in place of profit to Nigerian traders and investors.
In the midst of the losses, Diageo announced a cancellation of the tender offer and the planned equity raise in Guinness Nigeria altogether, citing the tough economic environment. This finally dashed the hopes of Guinness’ shareholders to ever reclaim their huge losses.
When the market did not hear from them again, the price started dropping until it came below N100. It was at that point after over a year of silence that they announced that they were no longer doing the offer. Panic ensued and the price nosedived to as low as N60 level at the time.
Breaking the sad news, Reuters said, “Diageo has scrapped plans to lift the share in Guinness Nigeria due to tough conditions in one of its biggest markets for the world-famous stout, the drinks company said on Wednesday. The decision by Diageo, which makes Johnnie Walker Scotch and Smirnoff vodka, is another blow to Africa’s biggest economy, which is headed for its first full-year recession in a quarter of a century following a plunge in oil prices.
“Diageo said last year it planned to buy 15.7 per cent of Guinness Nigeria for up to N41.37 billion, which would have taken Diageo’s stake to 70 per cent. While the naira has since slumped after the Central Bank lof Nigeria lifted a currency peg in June, Guinness Nigeria shares have also fallen to trade well below the price Diageo offered last year,” said Reuters on October 6, 2016.
The question coming from vexed traders and investors was why it had to take Diageo over a year to realise it could not carry on the investment plan. The company announced its intention to raise its stake in Nigeria in September 2015. It took them over a year to announce a retreat and close to a year to effect a rights issue.
IMAGE CRISIS
The travails of Guinness earned it a status downgrade in the Nigerian Stock Exchange early April, 2017, when the exchange announced that it had downgraded Guinness Nigeria from its special pricing status category, following the deprecation in its share price. Of course, this was a pointer to a drop in investors’ confidence in the stock of the firm.
“We bring to your notice that Guinness Nigeria Plc has qualified to be reclassified from a high-price stock to a medium-priced stock, as the company’s shares hit below the N100 mark on 21 September, 2016 and it trades below N100 up till the close of business on March 28, 2017. This indicates that Guinness Nigeria Plc has traded below N100 in the last six months,” the Exchange announced in a circular dated April 3, 2017.
Guinness Nigeria eventually secured additional N37.7 billion new equity funds through its rights issue concluded in August 2017. The company had offered 684.49 million ordinary shares of 50 kobo each at N58 per share to existing shareholders on the back of five new shares for every 11 shares held as at the close of business on March 15, 2017.
According to analysts, the multinational had acquired the shares at N58 per share that Nigerian investors bought for N160 each. Diageo had granted Guinness Nigeria a $95 million loan facility to help it cope with dollar shortages at the peak of Nigeria’s foreign exchange crisis. It apparently converted the loan to mop up shares at lower prices; the gains of naira depreciation facilitated debt-equity convertibility. In the whole deal, retail investors had their fingers burnt.
Aside from Guinness, other multinationals and big firms were said to have been involved in a similar game of crowding out the small investors. Lafarge Africa Plc offered rights issues twice in 14 months. In November 2017, the cement producing company sold rights of about 3.1 billion ordinary shares of 50 kobo each at N42.50 per share.
In February 2019, it raised N89.21 billion in new equity funds again through rights issued at N12 per share. The rights issues were structured into convertible deals that allowed the majority core investor, LafargeHolcim, to convert its debts into equities.
Fourteen companies quoted on the Nigerian Stock Exchange then raised N340.6 billion via rights issues in 2017. Industry experts maintained that the plethora of rights issues that happened in the stock market then were mainly triggered by big companies which used the advantage of their size and assets to crowd out retail investors and smaller companies listed on the exchange. The result was a crash in earnings and dividend per share to the dismay of small investors but to the gain of large-volume shareholders.
Did the Nigerian regulator fail to protect the investors in the case of Guinness’ botched tender offer? No. The Nigerian Stock Exchange had at the time the deal was announced, issued a notice signed by Josephine Igbinosun, the then Head of Listings Regulation Department, advising the investing public not to misconstrue Diageo’s planned tender offer as a commitment to do so. In its Market Bulletin coded NSE/LARD/LRD/MB06/15/09/0909 September 2015, the NSE conveyed Diageo’s declared intention to increase its stake in Guinness Nigeria Plc from 54.3 per cent to a maximum of 70 per cent with a caveat: “Please note that today’s announcement is of Guinness Overseas’ intention and does not constitute the announcement of an offer itself and creates no obligation on Guinness Overseas or Diageo to make an offer. Accordingly, we wish to advise Guinness Nigeria’s shareholders that there can be no certainty that any offer will be made, nor as to the price or terms of any offer that may be made.
“Further developments will be communicated to shareholders in due course. The proposed partial tender offer will be subject to requisite regulatory approvals, including those of the Nigerian Stock Exchange and the Securities and Exchange Commission. The formal offer documentation will be posted to shareholders as soon as these approvals are obtained.”
HEALED WOUNDS
The “baffling deal” of 2016 seems to have been forgotten and the firm and the shareholders have moved ahead. The shares of Guinness Overseas Limited grew from 699,892,739 in 2016 constituting 46.48 per cent to 1,099,230,804 translating to 50.18 percent after the rights issue that replaced botched partial tender offer. That has remained till date.
Dividend payout in 2016 was 320 kobo per share, dropped to 64 kobo in 2017, but rose to 184 kobo in 2018. The figure dividend for 2019 was 152 kobo, nil for 2020 and 46 kobo in 2021.
The firm recorded a loss of N2.015 billion in 2016 and a negative Earnings Per Share (EPS) of 134k, which bounced back to a positive EPS of 128k and a PAT of N1.923 billion in 2017, PAT of N6.71 billion and EPS of 134k. For 2019, the figures were N5.48 billion PAT and 250 EPS, then a loss of N12.57 billion and negative EPS of 574k in 2020. As life begins to return to the large FMCG firm, it recorded N1.25 billion PAT in 2021 and EPS of 57k.
The firm’s directors’ remuneration rose from N274,141 million in 2016 to N455,300 million in 2017 and N962,571 million in 2018. The figure for 2019 was N488,929 million, and N607,888 million for 2020. In 2021, the firm’s directors received N589, 855 million.
Commenting on the 2021 result, Guinness Nigeria Plc Managing Director/CEO, Mr Baker Magunda said, “The performance of fiscal 2021 showed that the business delivered growth despite the challenging external environment characterised by COVID-19 restrictions and high inflation.
“Revenues grew double-digit across all key categories, particularly our strategic focus brands Guinness, Malta Guinness as well as our local and imported spirits. This was supported by improved product mix and headline price increases in key brands. Gross margins declined by 3 per cent driven by inflationary pressure, a shift towards more expensive can products given at-home consumption trends, and forex devaluation impacting some materials.”
The company however revealed that its net finance costs remained on a similar level as last year despite the lower debt position, due to the devaluation of Naira impacting the foreign currency-denominated trading balances.
“Tax was impacted by a one-off historic charge. Profit before tax increased to N5,8billion, a 134 per cent growth versus same period last year; and distribution expenses increased by 22 per cent versus last year behind volume growth due to efficiency improvements across distribution channels.
“Going into the new fiscal year, we are conscious of the continued challenging operating environment with double-digit inflation and pressured consumer income spending. However, we will continue to focus on our strategy – optimising our route to consumers, innovating at scale to satisfy our consumers and improving cost control – as we continue to emerge stronger from the current crisis. We remain confident about the execution and resilience of our Total Beverage Alcohol strategy as a key driver of sustainable growth in the market”, Magunda added.
The Chair of the Board of Guinness Nigeria Plc, Dr. Omobola Johnson assured that “the Board will continue to support Management in its efforts to sustain global best practices aimed at consistently delivering business growth for stakeholders.
We remain confident that the strategy is comprehensive and robust, and that we are making the right investments in the company to ensure our long-term competitiveness” she said
Firms in the FMCG sector were badly hit at the peak of the 2020 COVID-19 outbreak. The 15-months land border closure also had its toll on these companies as many could not distribute or export their products. Procurement of raw materials was also severely challenged. Barring unforeseen circumstances, Guinness Nigeria will bounce back and achieve sustainable growth in the years ahead.
Doyen of the Nigerian Stockbrokers, Sam Ndata, said while the botched tender offer could be part of Guinness Nigeria’s problems, it has nothing to do with their reduced turnover. He attributed the downturn in the firm’s fortunes to challenges of the harsh operating environment. “The investors’ confidence is still in the company, hence the levels of subscription recorded during the rights issue”, he said in a note to THEWILL.
The National Co-ordinator, Pragmatic Shareholders Association, Mrs Bisi Bakare, said the COVID-19, prolonged land board closure, foreign exchange scarcity, inflation and the general insecurity in the country combined to weigh against the company. She noted that Guinness’ parent company came to the Nigerian subsidiary’s aid during the challenging times of forex scarcity. “As an investor, I appreciate the company’s management for ensuring that the firm comes back to profitability from its loss position last well. We just hope that the trend will continue in the years to come,” she told THEWILL in a note.
Mr Paul Uzum, Stockbroker at Golden Securities Limited had said the botched Guinness tender offer is now a thing of the past, and that investors have moved on.
The mail sent to the Guinness Corporate Communications Agency was not responded to at the time of going to press.
Notwithstanding the challenges, Guinness has maintained its robust corporate social responsibility. It paid N14.93 billion company income tax from 2016-2021.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
