Stellenbosch - Distell announced on Wednesday that it has entered into an agreement to sell its cognac business, Bisquit Dubouche et Cie (Bisquit), to Campari Group for €52.5m (about R800m).
According to Distell’s managing director, Richard Rushton, the Bisquit brand remains strong and well positioned for long-term growth.
"As we have said consistently for the last while, Distell has obviously embarked on a journey to focus our business and to create winning propositions in winning geographies. We did an assessment and we want to focus on addressable opportunities where we can win in the longer term," Rushton told Fin24 on Wednesday.
"We also looked at the asset configuration of our brands, production and the broader asset base. We want to focus on more asset-efficient opportunities and balance our portfolio better to improve our margin and return on investment."
The main focus is on ready-to-drink ciders, whisky and expansion into Africa as well as "one other large emerging market", Rushton explained.
He said at the time of acquiring Bisquit, Distell felt it would provide access to the Russian and Chinese cognac markets. This did not happen and the company felt it was then better to sell off Bisquit.
"Cognac is a heavily concentrated industry. The top three players have a significant share of the market, especially in the two premium-end growth markets in world, namely China and the US," said Rushton.
"We were a much smaller player and did not have our own route to market access in those markets. Our view was that the cost to gain access to those markets for the returns we would get, were unattractive. It is better for us to focus on whisky opportunities and ready-to-drink ciders."
Rushton emphasised that, even though Distell was unable to access key cognac markets in Russia and China after the acquisition of Bisquit, the company did manage to build the market for it in SA. The business is, however, just breaking even now.
"So, in terms of our strategy, the effort required did not match the return from a financial perspective," said Rushton.
"The key thing is this should be seen as a positive signal for us to accelerate our core markets and now that we have focused on the winning parts of our wine portfolio, to do the same with our ready-to-drink ciders and whisky. Distell is, therefore, now focusing on the categories it believes to have the greatest growth prospects."
In his view, the sale will ensure the assets within Distell's portfolio align with its strategy and generate long-term shareholder value.
"The disposal of Bisquit will allow us to focus our efforts on accelerating our growth in key product categories and markets where we believe we can deliver more attractive returns and deliver on our growth aspirations," he said.
The deal is expected to close during the first quarter of 2018.
Bisquit Cognac was established in 1819 by Alexandre Bisquit. The brand’s key markets include South Africa, Belgium and Switzerland.
According to Distell, the terms of the sale agreement are that Campari Group - one of the largest spirit groups in the world - will acquire all the shares in Bisquit. It will also acquire existing stock, maturing inventory, the trademarks as well as production facilities - warehouses, blending cellars and a bottling plant.
The brands involved include a range of cognacs - Bisquit V.S. Classique; Bisquit V.S.O.P.; Bisquit Prestige; and Bisquit X.O., as well as rare collections and limited editions.
Fin24 reported in August that Distell's annual results for the financial year ending on June 30 2017 reflected the pressure on domestic consumers and increased global competition, according to Rushton. The company declared a total dividend of 379 cents per share for the financial year.
Group revenue increased by 3.7% to R22.3bn while maintaining sales volumes. Domestic market revenue increased by 7.8% and sales volumes increased by 1.5%. Headline earnings decreased by 3.6% to R1.6bn and headline earnings per share (HEPS) decreased by 3.7% to 708.3 cents - but increasing by 7.4% and 7.2% respectively on a normalised basis.
The Group has continued to ramp up its investment on the African continent, for instance acquiring a further 26.4% stake in Kenya's KWA Holdings East Africa (KHEAL). Distell now owns a majority shareholding in KHEAL of 52.4%.
African markets, outside of South Africa, delivered mixed results amid continued economic uncertainty and lower income from commodities. Revenue was maintained on sales volumes which were down by 5.2% compared to the previous year.
Focus markets in Africa such as Namibia, Kenya, Nigeria and Zimbabwe all recorded strong growth, but Distell's overall performance was again negatively impacted by the tough macro-economic conditions in Angola. The region contributed 50.1% to foreign revenue.
"The performance in international markets beyond Africa was resilient amid more challenging trading conditions and consolidation of multinational competitors entrenching their dominant positions," Distell said at the time.
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