Brewing giant Heineken Beverages is in hot water after the Competition Commission said it is “in apparent breach” of the conditions stipulated when it approved a R40.1bn merger with Stellenbosch-based Distell in 2023. Heineken Beverages is 65% owned by the Dutch brewer Heineken NV, 18% by Remgro and 17% by others.
At the time, the commission gave the deal the green light only on condition that Heineken sell Strongbow, the country’s third-largest cider brand, to an independent black-owned firm named Cider House Investments (CHI), since Distell already owned the country’s two largest cider brands, Hunter’s and Savanna.
Last year, however, CHI complained to the commission that Heineken has since broken the deal conditions.
Derek Szabo, a director of CHI shareholder Signal Hill Products, said in an affidavit to the Competition Tribunal that Heineken surreptitiously “hollowed the brand out” after the deal. “This was not an ordinary commercial mismanagement, and it was not a series of unconnected operational lapses. It was a pattern of conduct by the new owner of Savanna and Hunter’s [to make] Strongbow weaker and Heineken’s new brands stronger.”
CHI is 51% owned by Amber Hill Ventures (controlled by Sabelo Sithebe) and Livor Investments (controlled by Litha Yaya), with 49% in the hands of Signal Hill, which owns beer brands including Devil’s Peak, Striped Horse, St Francis Brewing Company and Fokof Lager. It’s understood that CHI paid more than R350m for Strongbow.
Speaking to the FM this week, Szabo says that what Heineken did amounted to sabotage.
“After they sold Strongbow to us, they not only increased the retail price of the 660ml pack by 28.5%, they halved the marketing spend and only delivered two out of every three orders,” he says. “The business we bought is now struggling, having lost more than R1bn over the past few years, against what Heineken had forecast.”
Broken arrow
The price hikes hurt Strongbow’s market share, since Distell had only raised the price of Hunter’s by 19% and that of Savanna by 22%. When Heineken handed over the business in August 2023, Szabo says it was “trending at about half its prior year volume”.
Szabo points to other behaviour too. For instance, Heineken agreed to devote at least 12% of the space in its 39,500 fridges in retail outlets to Strongbow.
But in 2023, a concerned Szabo wrote to Heineken saying its “sales reps are actively removing Strongbow from the Heineken fridges, which is not aligned with our agreement”. Heineken, he says, later attributed this to “confusion” among the sales reps. (Heineken says it did not remove Strongbow from the fridges and acted in accordance with the merger conditions at all times.)
When it came to the marketing, Heineken maintained that it was “reasonable and rational … to not implement any new major marketing campaigns for Strongbow prior to the divestiture but rather continue with existing lower-cost campaigns”.
Szabo says, however, that the deal conditions required “ongoing promotion and advertising in accordance with any approved business plan, or any existing promotion and advertising expenditure budget”.
A year ago, CHI complained to the commission about all of this. Finally, on September 1, the commission told Heineken that it had found “there has been an apparent breach of the divestiture conditions”.
It said Heineken had “failed to provide adequate marketing support to the Strongbow brand to preserve and maintain [its] economic and competitive value”.
The commission added: “It appears that Heineken managed the Strongbow business in a manner that materially and adversely altered the economic value and competitiveness of Strongbow, contrary to the divestiture conditions.”
Heineken hits back
In response to questions from the FM, Heineken rejected CHI’s accusations. “We have substantially complied with all of the divestiture conditions, and we accordingly disagree with the initial view of the commission,” says Tshidi Ramogase, Heineken Beverages’ corporate affairs director.
Ramogase tells the FM that these are “merely preliminary findings”, and Heineken has had “constructive interactions” with the commission to resolve the issue. She emphasises that Heineken respects the commission’s process.
“Heineken South Africa does not admit the conduct complained about. On the contrary, Heineken has gone to extraordinary lengths to support the Strongbow brand,” she says. “Heineken is also confident that it will establish that it acted in good faith throughout … and remains committed to compliance with the merger conditions.”
Ramogase says the fact that it picked CHI, even though its financial offer was among the lowest received, demonstrates its bona fides. “Heineken considered CHI, with the benefit of support from Signal Hill, to be the best placed of all the bidders to take the Strongbow business forward,” she says.
But Sithebe doesn’t buy it. He tells the FM that the deal was a rare opportunity to create a major black-owned player in the drinks market. And it entailed a huge investment: as part of the deal, CHI undertook to build a new R1.47bn brewery, which it did on the strength of the Strongbow forecasts.
Disincentive to invest
“It was an attractive opportunity, since we could partner with an experienced operator in Signal Hill to create the only South African-owned large player in the market,” he says. “We always knew competition would be tough, but it has been disappointing to experience the unforeseen and deliberate lengths that Heineken went to to ensure it wasn’t a level playing field.”
Sithebe says it’s vital for the commission to address this, in part because when merger conditions aren’t followed, it becomes a serious disincentive to invest.
Either way, the losses from Strongbow have left CHI in a financial bind — though Heineken is adamant it didn’t cause the problem. In its legal responses, Heineken said it gave CHI no warranties that sales would reach any specific level. This was normal “commercial risk”, it said.
Szabo disagrees, saying the buyers relied on Heineken’s assurances prior to the handover that Strongbow would be “commercially successful and managed in the ordinary course of business”. This evidently didn’t happen, he says.
In the end, he says this amounts to far more than a typical David-and-Goliath commercial tussle; how this is handled will be a barometer of whether the competition authorities are serious about ensuring that the business environment is fair to smaller firms.
“A company can’t agree to whatever conditions are put before it simply to get a deal done and then fail to do what it agreed to — or worse, set out to sabotage a competitor,” he says.
