(NAIROBI, KENYA) – The Competition Authority of Kenya is demanding that East Africa Breweries Limited set up a KES 15.5 billion reserve fund before it approves Diageo’s sale of a 65% stake in the brewer, causing a stalemate in the KES 388.2 billion deal.
The competition regulator wants EABL to create a dedicated reserve equal to 4% of the transaction value that Japan’s Asahi Holdings will pay Diageo. The fund would cover liabilities that may arise after the deal.
The demand has triggered protest from EABL and Asahi, who have accused the regulator of assuming powers of the court, according to several people familiar with the matter.
The money would be ring fenced and used to settle or resolve claims, disputes, liabilities and other legal or regulatory challenges involving third parties, the regulator told the National Assembly’s Finance Committee.
The Competition Authority also wants the merged entity to reserve at least 20% of refrigeration space given to retail outlets for products that are not EABL or Asahi branded. The regulator said the condition is meant to stop the combined business from using its distribution network and company owned equipment to shut out competing brands.
The two transacting parties have rejected the conditions, arguing that the proposed remedies are unprecedented, unprocedural and have no legal basis.
The dispute has stalled the transaction nearly a year after Diageo and Asahi announced the proposed sale. The deal has secured regulatory approvals in the other East African markets where EABL operates.
Besides Kenya, EABL has operations in Uganda through Uganda Breweries Limited and in Tanzania through Serengeti Breweries Limited.
In a memorandum to Parliament’s Finance Committee, the Competition Authority said its review had identified competition and public interest concerns that could be addressed through behavioural remedies rather than by blocking the transaction.
The authority said Asahi, although it does not currently operate in Kenya, is a credible potential entrant into the Kenyan alcoholic beverages sector.
It found that the merged entity would continue to benefit from EABL’s extensive distribution network, branding arrangements, exclusive sales territories, product placement arrangements and company owned refrigeration equipment.
The regulator said these features had the potential to reinforce the merged entity’s market position, foreclose competing manufacturers from key retail outlets, increase barriers to entry and expansion, and reduce future rivalry in already concentrated markets.
The refrigeration condition is aimed at ensuring competing manufacturers keep access to retail outlets. The Competition Authority proposed that at least 20% of refrigeration space issued to outlets be reserved for products that are not EABL or Asahi branded.
The authority excluded top end drinking establishments, supermarkets, petrol stations, liquor stores and hotels above two stars.
The regulator also raised public interest concerns arising from ongoing court proceedings and regulatory matters involving micro, small and medium enterprises and other third parties with commercial relationships with EABL.
Among the matters cited was a claim by Bia Tosha Distributors of about KES 8 billion, arising from alleged loss of profits following termination of its distributorship. That is about $61.7 million and £48.8 million.
The authority also cited JILK Construction’s claim of about KES 2.45 billion relating to the Kisumu brewery project, as well as complaints by distributors alleging abuse of dominance by EABL. That is about $18.9 million and £14.9 million.
The Competition Authority said the financial reserve was intended to address these claims and anticipated settlement obligations. Its first proposal required EABL to establish a reserve equal to at least 10% of the transaction consideration. The authority later reduced the requirement to 4% after further review, saying this reflected the total value of identified claims and anticipated settlement obligations.
The Competition Authority Director General David Kemei said in the memorandum that EABL should, before completion of the transaction, establish and maintain a dedicated financial reserve equal to or not less than 10% of the total transaction consideration. He said the reserve should be ring fenced and applied solely towards settlement or resolution of any third party claims, disputes, proceedings, liabilities, regulatory actions or challenges arising directly or indirectly from the transaction.
Diageo and Asahi have challenged the requirement, saying a condition requiring the reservation of money to protect against litigation matters is unprecedented and unprocedural.
The companies argue that EABL is a going concern and highly profitable, as shown by its latest full year results, and that it has never failed to meet any of its legal obligations in its 104 year history.
They further argue that similar conditions have not been imposed on other transactions in recent years that were approved without conditions by the Competition Authority or other antitrust bodies, including the Common Market for Eastern and Southern Africa and the East African Community.
The companies say the Competition Authority has no legal mandate to impose the conditions. They say the claimants did not have access to the ring fenced money before the proposed transaction and should not gain such a benefit simply because EABL’s ownership is changing.
On Bia Tosha, the parties argue that courts have already rejected the distributor’s request to have KES 8 billion set aside in its dispute with EABL. They say revisiting the matter through merger conditions would amount to litigating the case afresh.
On JILK, they say the matter remains before the courts and that the judge is expected to determine the company’s request to have about KES 3 billion set aside in relation to its dispute with EABL.
The parties argue that the regulator’s intervention risks interfering with matters before the High Court.
They also say the regulator’s position is inconsistent because it appeared in JILK’s case as an interested party and opposed the company’s interim orders seeking to stop the transaction pending determination of its dispute with Kenya Breweries Limited.
Diageo and Asahi also reject the refrigeration condition, arguing that EABL is a going concern and that market conditions will not change simply because its shareholder is changing.
They say the companies that actually trade in Kenya are KBL and UDV Kenya and argue that the listed EABL should not be subjected to conditions based on market circumstances that are expected to change.
The Competition Authority maintains that its assessment considered the likely effects of the transaction on consumers, employees, suppliers, distributors, local manufacturers, minority shareholders and other stakeholders.
The authority says it consulted market participants and considered ongoing disputes and regulatory matters before proposing the remedies. The regulator has now sought an advisory opinion from the Attorney General on the legal scope of its merger review powers.
Japan’s Asahi has been hunting for opportunities in markets including Africa and South America as it looks to expand globally. The Japanese firm said EABL offers an unrivalled portfolio of brands, marketing capabilities and production facilities.