Wine Industry Report

PSG’s investment in an 11.3% stake in KWV Limited can be seen as a vote of confidence in the future of the SA market.

Monday’s news of the purchase by PSG Group of retail (and wine) tycoon Christo Wiese’s 11.3% stake in KWV Limited in a deal valued at R137.2 million can be seen as a vote of confidence in the future of South Africa’s alcoholic beverages market. It is one that is timely and much-needed, particularly for wine producers, given the current poor state of the middle- and lower-priced wine market in SA and fiercely competitive international conditions.

This must represent one of the first times (if not the first) that a listed financial services company has decided to take an ownership role in the local liquor market.

“We are taking a contrarian decision and see it as a value play,” PSG Chairman Jannie Mouton explained to Winenews. “We are buying at good net asset value (NAV) per share at a time when conditions aren’t that good in the industry, which is the best time to buy. We know KWV quite well and are positive about the brand’s future-it is a great asset and know there is good value to be unlocked.”

With its purchase, PSG has acquired a say in the management of KWV and a small indirect 3.6% stake in Distell. Wiese held a seat on the KWV board, and Mouton said that, although there had not yet been any discussions as to PSG’s representation, there is a good possibility that there will be a seat for his company going forward.

It will be interesting to see what potential impact, if any, a representative from outside the wine industry - and from a competitive sector like financial services - might have on KWV’s operations.

Mouton has become well known for his smart and innovative investment choices over the years, building up PSG Group into a substantial role player in most fields of the financial services sector through both organic growth and clever acquisitions. More recently he has demonstrated a keen interest in unlocking value from complicated ownership structures (like media group Naspers) and large unlisted entities such as Pioneer Foods.

Now it’s KWV’s turn. Like Pioneer, KWV’s shares have been traded over-the-counter by PSG On-Line for the past few years.

Mouton said that it would have been very difficult to build up a substantial stake in KWV by gradually buying up the 55.4 million shares in the OTC market, given the relatively poor liquidity of the counter, so buying directly from Wiese was by far the best option. Still, PSG has acquired a few extra shares via this route, now holding in total a 12% stake in KWV, the Chairman revealed.

Given KWV’s recent sales performance, Mouton’s R137m punt could only have been based on a bullish long-term outlook. For the six months to end-December 2005, KWV’s export volumes fell by 1.2%, with mixed results in various markets. Total sales of branded products rose by 6.4%, driven by volume growth of 37.9% in South Africa, off of a small base.

KWV CEO Willem Barnard was relatively downbeat on prospects for the first six months of 2006, noting back in March that international trading conditions in the wine industry remained very tough, on the back of weak consumer spending and the ongoing wine glut. Locally, demand for wine has been mostly flat, apart from the high end of the market, while, according to Barnard, the brandy market is in decline. Mouton, meanwhile, emphasized that the investment represented a long-term view. Exports would improve as the rand weakened, he pointed out.

“It doesn’t represent a negative outlook for the rand, but a positive one for KWV,” he stressed.

The PSG Chairman has an excellent track record in his past investment decisions. And market reaction to the deal was extremely positive, with PSG ‘s shares surging 7% on the news.

by Lynn Bolin
[Source: wine.co.za]