SABMiller to Sell $1.09 Billion Stake in Tsogo Sun

SABMiller Plc said it will sell a $1.09 billion stake in South African hotel and casino operator Tsogo Sun Holdings Ltd. as the world’s second-biggest brewer looks to bolster beverage operations in Africa.

Following a review of its 39.6 percent holding in the Johannesburg-based company, SABMiller will divest the stake in a two-stage transaction involving a sale to institutional investors and a buyback of shares by Tsogo Sun, the maker of Peroni and Castle Lite said today in a statement.

The beverage maker generates almost one-third of its earnings from the African continent, and South Africa is the second-biggest provider of the company’s revenue after Latin America. It struggled to grow in South Africa last year amid rising inflation and increased competition from Heineken NV and Diageo Plc, while expansion across Africa has been hampered by tough economic conditions in South Sudan and Zimbabwe.

In addition to protecting market share in South Africa, “there remains a lot of whitespace opportunity for them in Africa as well,” Philip Gorham, an analyst at Morningstar, said in an e-mail. “Kenya is an opportunity. Their presence is quite patchy, and they could look to plug some geographic gaps.”

Decelerating Volume

Since taking the helm last year, SABMiller Chief Executive Officer Alan Clark has sought to offset declines in Europe and a difficult U.S. market by cutting costs and targeting developing economies across Latin America and Africa. SABMiller gets more revenue from developing regions than other major brewers.

“Gaming and hotels are not core to our operations and we have concluded that the time is right for us to exit our investment,” Clark said in today’s statement.

SABMiller shares fell 0.9 percent to 3,368.5 pence as of 1:19 p.m. in London. Tsogo Sun declined as much as 7.4 percent, the most on an intraday basis in more than a year, and traded 2.8 percent lower at 26.15 rand in Johannesburg, giving the company a market value of 30.9 billion rand ($2.9 billion).

“We support Tsogo Sun in buying back the shares,” said Johnny Copelyn, CEO of the casino operator’s biggest shareholder Hosken Consolidated Investments Ltd., which now owns 47 percent of the company. “It’s a good company. The industry has a good future,” he said by phone.

SABMiller said in April it was considering options for the stake. The possibility that the brewer could sell its holding increased after SABMiller merged Tsogo Sun with Gold Reef Resorts Ltd. in 2011, a transaction that reduced its stake from 49 percent.

‘Anemic Growth’

SABMiller was founded in South Africa, where it first sold beer to thirsty miners more than a century ago. The company controls about 90 percent of the beer market in South Africa, yet the slowing economy, social instability and the weakening rand have weighed on improvements there.

“We think SABMiller is likely to report another quarter of anemic growth before trends improve,” Trevor Stirling, an analyst at Sanford C. Bernstein, said in a note today.

Tsogo Sun has more than 90 luxury hotels in seven African countries including Nigeria and the Seychelles. Its interests include Montecasino, Johannesburg’s Tuscany-themed hotel, theater and casino complex.

“There are wider implications in that it further entrenches HCI as the parent in Tsogo,” De Wet Schutte, a Cape Town-based analyst at Avior Research, said by phone. The buyback “won’t stretch Tsogo’s balance sheet, they’ve got ample capacity in the balance sheet to buy back these shares and still continue with the fairly large capex program.”

(A previous version of this story was corrected to fix the spelling of Africa.)

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