East African Breweries Ltd could lose its Tanzania subsidiary Serengeti Breweries Ltd after Tanzania’s Fair Competition Commission issued a notice of intention to revoke a merger between the two companies.

In a notice in the Tanzania media, the FCC accused EABL of breaching merger agreement rules, and not ensuring improved performance at SBL.

FCC director-general Fredrick Ringo said investigations showed that EABL was breaching the rules provided for under the FCC agreement.

“While monitoring EABL’s compliance with the merger approval conditions, we observed that, based on the rationale of the approval, the performance of SBL was not as per the expectations of the commission,” Dr Ringo said.

The FCC has invited submissions from companies, and any other interested parties who feel that the revocation will affect their interests.

A source at FCC said the agency sent EABL a letter of the intended revocation in April, laying out the areas in which it felt the brewer had failed to act in regard to SBL’s performance in the market.

EABL group corporate relations director Julie Adell-Owino confirmed receipt of the notice on April 24.

“We have provided the FCC with a full response to the statements made in the notice. We also wish to inform the public, our shareholders, customers and all other stakeholders of SBL that we are vigorously disputing the intended revocation and are awaiting a date for a formal hearing with the FCC,” Ms Adell-Owino said.

It is unclear what options are available to EABL or SBL should the outcome of the hearing be against the merger. SBL controls 16 per cent of the beer market in Tanzania. The terms of the merger agreements saw EABL give up its 20 per cent stake in the market leader Tanzania Breweries Ltd.

The FCC also barred the Kenyan brewer from closing any SBL plants until the end of 2015, without the commission’s approval.

Another requirement is for EABL to continue promoting Serengeti’s corporate identity and retain SBL’s key brand, Premium Serengeti Lager. EABL is also required to submit an annual progress report to the FCC that will include the progress on the investment strategy plan that it had submitted during the application for the merger.    

Kennedy Nkumo, a corporate lawyer who has been involved in various mergers and acquisition deals in Tanzania, termed the FCC’s action as unfair, based on the growth target.

“This kind of condition is allowed by law; the FCC ought to understand the business dynamics. The regulator should try to understand the kind of investment in SBL, the impact of competition on growth, and other macroeconomic factors before imposing a revocation notice,” Mr Nkumo said.

Under the Fair Competition Act 2003, the FCC can authorise the merger unconditionally or with conditions, which it can then use to gauge the benefits of the merger under the set conditions. Under sub-section 12(1b), one of the conditions imposed in the merger agreement was that EABL introduce greater efficiency in production and distribution at SBL.

Competition Authority of Kenya director-general Francis Kariuki said that it was not strange for competition agencies to put conditions on mergers. He cited two types of conditions — structural and growth performance.

“It’s always very difficult to maintain performance. The actualisation of growth performance is very difficult. I understand that the EABL/SBL issue involved growth performance, which is a very tricky conditionality, especially because growth performance is market determined,” Mr Kariuki said.

Market analysts say the actualisation of performance-based conditionalities is difficult to achieve. It is always good to go for structural conditionalities.

“Conditionalities are usually agreed upon between the parties and regulators. They agree on these terms and put in administrative penalties if these conditions are not met. The parties are usually careful not to be fined because of the reputational risks. Actualising and meeting performance-related conditions is difficult,” Mr Kariuki said.

EABL previously had a reciprocal production and marketing deal with SABMiller’s TBL: TBL was mandated to sell EABL’s brands in Tanzania, and vice versa. For the merger to go through, EABL had to terminate the agreement — it sold its 20 per cent stake in TBL for $71.4 million.

The EABL/SBL merger was approved in July 2010, which saw EABL acquire a 51 per cent stake in SBL. The FCC said that according to the merger agreement, EABL had committed to ensure that SBL achieved more growth.

SBL produces brands such as Premium Serengeti Lager, The Kick and Uhuru Lager. It also produces Tusker, Pilsner, Tusker Malt Lager, Guinness and Malta Guinness, and distributes spirits like Johnnie Walker, Baileys, Smirnoff, Gilbeys, and Captain Morgan.

In 2010, Diageo, which owns 50.02 per cent of EABL, agreed to buy a 49 per cent stake in SBL by July 2014 for $600 million based on the performance of the Tanzanian unit. SBL posted an operating loss of $2.7 million in the 2013/14 financial year.

Last year, Diageo delayed the purchase of SBL for a further four years, citing slow growth in Tanzania’s breweries.

READ: Diageo delays plan to buy Tanzanian subsidiary of EABL

“Diageo has a call option in 2015 to purchase the remaining 49 per cent stake in SBL. The transaction will require at least $60 million. We believe that the main reason for the extension of the option until 2018 is to enable the business to turn profitable given all the investments made from 2010 to date,” said Standard Investment Bank in a research note.