In news today, Diageo (LSE: DGE) announcedthe restructuring of its South African and Namibian operations.
The firm was partnered with Heineken N.V. and Ohlthaver & List. A sale of assets will now see Diageo raise around 128 million and free the firm to concentrate on the next stage of growth in the region for spirits, ready-to-drink blends (RTDs), beer and cider, with a simplified ownership structure.
In full control
The move is important to Diageo because it puts the firm in charge of the driving, on its own. Diageos presence in the area means the firm operates in SABMillers (LSE: SAB) natural heartland, which makes a comparison of the two alcoholic beverage providers interesting.
Diageo will operate in South Africa and Namibia through wholly owned subsidiaries. To pull off the transaction the firm plans to sell various brewing and drinks assets to Heineken, and acquire the remaining shares which it does not already own in brandhouse Beverages (Proprietary) Limited, the beer and spirits sales and marketing joint venture in South Africa, which will give Diageo full control.
Heineken plans to emerge from the deal as the #1 beer-focused outfit in the region, which could put still further pressure on SABMillers South African business.
Clash of the defensive titans
The pursuit of supplying consumer goods with great repeat-purchase credentials has always been a nice little cash generator. The fact that Diageo and SABMiller produce alcoholic sin products with the added attraction of addiction thrown into the mix makes beverage suppliers seem even more defensive. Thats why we investors fall so hard for such firms consistent cash flow often leads to a generous, steady and rising dividend payout.
Yet we can see from Diageos and Heinekens manoeuvring that these firms are serious about growing market share in the South African and Namibian regions, possibly at the expense of SABMillers market share.
Drinks companies have loyal customers but they still operate in competitive markets. The outcome of competitive skirmishes in this one region wont make or break any of these firms on its own as all three enjoy worldwide operations.
What now?
At a share price of 1824p Diageos forward dividend yield runs at 3.1% for year to June 2016 and the forward price-to-earnings ratio (PER) sit at just over 19. City analysts following the firm expect earnings to grow 6% that year.
Meanwhile, SABMillers share price of 3342p throws up a forward dividend yield of 2.3% for year to March 2016. The forward PER of 22 compares with analysts predictions of an 8% uplift in earnings.
SABMiller’s rating remains richer than Diageo’s, and watchers still expect slightly brisker growth. However, only one of these companies claims a place on a list of five top investments featured in this Motley Fool wealth report.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.