Brewers in aggressive fund raising to reduce negative working capital

Nigerian brewers are tapping into the capital market to secure much-needed funds and navigate negative working capital as they grapple with a liquidity crunch.

Data tracked by BusinessDay reveals that four breweries listed on the Nigerian Exchange have accumulated a negative working capital of N441.2 billion in the first six months of 2024.

Negative working capital occurs when a company’s current liabilities exceed its current assets, suggesting that the company lacks sufficient liquid assets to cover its short-term financial obligations. One way to navigate it is to turn to raise funds through debt or equity, financial analysts say.

Between January and June 2023, Nigerian Breweries’ negative working capital grew to N396.4 billion from N357 billion at the start of the year.

Guinness Nigeria’s negative working capital was N119.2 billion as of June 30, 2024, up from N46.5 billion at the start of 2024. Champion Breweries also posted a negative working capital of N2.2 billion at the end of H1 2024. However, International Breweries posted a net positive position in terms of its working capital, as it recorded a working capital of N76.6 billion as of June 30, 2024.

Adebayo Adebanjo, senior analyst with Cardinalstone Securities noted, “Negative working capital implies that the company is illiquid. Essentially, it is unable to settle its short-term obligations as they fall due. It’s concerning for companies like brewers that are very cash-driven.”

He added, “Though I think the nature of the business, which has very high cash flows, should enable them to reverse these negative positions in the short-term. But because it could be persistent, they need bigger flows to outrightly settle some of these obligations.”

Negative working capital trend among Nigerian brewers

A review of the balance sheets of these breweries since 2020 shows that negative working capital is a trend among these companies. For example, Nigerian Breweries has been operating in a position of negative working capital since 2020. The company posted a negative working capital of N102.3 billion at the end of FY 2020. It declined to N152.4 billion in 2021, stood at N252.3 billion in 2022 and N356.9 billion in 2023.

For International Breweries, the story is not much different as it hit a negative working capital of N347.5 billion at the end of Q1 2024.

Just like Adebayo noted, when the negative working capital position remains persistent, the company needs to attract bigger cash inflows.

In attracting bigger cash flow, it has been observed that these companies are looking to tap the capital markets, particularly the Nigerian Exchange (NGX). For example, after closing Q1 2024 with a negative working capital of N347.5 billion, International Breweries launched an N588 billion rights issue programme featuring 161 billion issued shares.

Facts about International Breweries’ rights issue

The N588 billion rights issue programme was 87.75 percent oversubscribed, with 141.43 billion shares taken up by the company’s shareholders. It amounted to a capital raise of N516.2 billion for the company, which was used to offset the company’s current liabilities.

The rights issue was a strategic move to restructure its debt to AB InBev, its parent company. Recall that International Breweries had a convertible loan of $379 million with AB InBev. The loan had been used to repay the outstanding part of a $424 million loan taken from CitiBank Abu Dhabi in 2018.

To convert the loan to equity, AB InBev fully subscribed to the rights issue, effectively converting International Breweries’ debt into equity. As a result, International Breweries raised around N514 billion from AB InBev, though no actual cash was exchanged in the process.

Nigerian Breweries N599 Billion Rights Issue

Nigerian Breweries Plc recently received the Securities and Exchange Commission’s (SEC) approval to carry out its N599 billion rights issue programme. The company seeks to issue new shares on the basis of eleven (11) new ordinary shares per five shares held at an issue price of N26.50 per ordinary share.

In a press release, Hans-Essadi, the company’s managing director, noted that the proceeds of the issue would be used to settle the company’s local and FX-denominated obligations.

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At the end of H1 2024, Nigerian Breweries had short-term and long-term obligations of about N588.2 billion, marking a net increase of N246.6 billion from the end of 2023. A review of the company’s loans and borrowings shows its obligations are to Nigerian banks, the Bank of Industry, and the parent company, Heineken N.V Group.

Just like International Breweries, Nigerian Breweries is also looking to convert its debt to Heineken into equity. During its Annual General Meeting in April, one of the resolutions read, “That the Directors of the Company be and are hereby authorised to apply any outstanding shareholder loan, trade payable, or any other loan facility due to any person from the Company as may be agreed by the person and the Company, towards payment for any shares subscribed for by such person under the Rights Issue.”

At the moment, there is no publicly available data on how much the company owes to Heineken. However, if the group fully subscribes to the rights issue, Nigerian Breweries can raise about N339.6 billion from Heineken alone. Just like the case of AB

InBev with International Breweries, Heineken Group taking up all of its rights will mean a debt-to-equity conversion rather than a cash injection. Reports suggest that Heineken is going to take up its full rights in the programme.

Nigerian Breweries owes about N341.5 billion to its vendors and suppliers as part of its current liabilities of about N717.4 billion.

If the company’s rights issue is fully subscribed and N599.1 billion is raised, part of this sum is expected to go to settling these trade payables.

Essentially, a full subscription to the rights issue will shift the company’s working capital into a net positive of about N202.6 billion.

Different strokes for Guinness and Champion Breweries

Despite facing a shortage of liquid assets, Guinness Nigeria and Champion Breweries have not announced any plans to raise capital from the Nigerian Exchange (NGX). This is tied to the fact that both companies are undergoing changes to their ownership structures, as Diageo Group announced its divestment away from Guinness to sell its stake to Tolaram.

In February 2024, Heineken B.V announced the sale of its 86.5 percent stake in Champion Breweries to a new company, EnjoyCorp Limited.

Heineken’s stake in Champion Breweries was held through Raysun Nigeria Limited.

Guinness Nigeria has no long-term debt. However, it has short-term debts of about N40.1 billion, with about N39.3 billion of this sum being owed to Diageo. Also, the company has trade and other payables of about N175.9 billion, with N111.0 billion of this sum as trade payable to other Diageo subsidiaries across the world.

It is expected that with new owners coming on board to Guinness and Champion Breweries, cash injections are almost inevitable.

They are also adopting cash retention strategies

The liquidity crunch has also caused these companies to adopt new cash management tactics such as the sale of assets as well as pauses in their expansion drives.

In the first half of 2024, the four companies under review invested N64 billion in acquiring property, plant, and equipment, representing an 11 percent year-on-year increase from the N57.7 billion spent in H1 2023. However, considering Nigeria’s average inflation rate of 32.78 percent during this period, the expenditure translates to a net negative return.

As part of their cash retention strategies, the companies—except International Breweries—turned to asset sales. Nigerian Breweries, Guinness, and Champion Breweries reported a cash inflow of N2.97 billion from asset sales in H1 2024, up from N1.6 billion in H1 2023.

International Breweries turned to debt securities, as the company invested N27 billion in debt securities in H1 2024.