How Have The Low Crude Oil Prices Affected Guinness Nigeria?

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Guinness Nigeria, on September 20th, announced their results for the financial period ended June 30, 2016, wherein the company posted its first loss in at least 30 years. This has been a result of a downturn in Africa’s most populous nation, which increased costs and reduced the demand for the company’s products. The local unit of Diageo (NYSE:DEO), which owns 54% of Guinness Nigeria, reported a loss of 2 billion naira ($6.4 million), as compared with a profit of 7.8 billion naira last year. Revenue also dropped 14% to 102 billion naira due to the effect of the country’s foreign exchange, the devaluation of the naira, and a softness in the economy, as per a statement by CEO Peter Ndegwa.

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Guinness Nigeria- Stock Price

The oil-price crash and a number of political and security challenges have resulted in a gloomy outlook for the country. The government has even conceded that it may take years to recover. The country entered its first technical recession since 2004, marking an end to more than a decade of robust growth, which transformed the nation into the continent’s largest economy. According to Nigeria’s statistics authority, the country witnessed a 2.1% contraction in the second quarter of 2016, from a year prior, following a 0.4% decline in the first three months of the year. The oil sector plummeted over 17%, which reflects a shift in fortunes for the economy, as this sector was groomed to power Africa’s rise. The International Monetary Fund (IMF) has predicted the GDP to shrink 1.8% this year. The economic pressure in the country forced its central bank to remove the naira’s peg against the dollar. Thereafter, the currency lost a third of its value. Limited access to foreign currency has even forced a number of big businesses to pull out of the region, including international carriers United and Iberia.

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Parent company Diageo extended a $95 million loan to Guinness Nigeria, to help it cope with the dollar shortages, as the company’s currency needs were much larger than it was able to source locally and from its exports. Guinness Nigeria will also consider increasing its exports, including selling Guinness stout and its herbal drink Orijin in South Africa, to reduce its shortage of foreign currency, which the beverage maker needs to pay for imported goods. The company also noted a shift to cheaper beer brands in the country, as the disposable incomes decline, and is expanding its range of spirits to include more affordable brands. Besides this, Guinness Nigeria is also attempting to increase the amount of goods sourced locally, which will also ease the dependency on foreign currency. In this regard, the brewer will invest £12 million ($15.9 million) in a plant in Benin City, according to CEO Ndegwa.

These tough conditions have even prompted Diageo to scrap its plans for raising its stake in Guinness Nigeria to 70%. Last year the parent company had stated its intentions to buy an additional share of 15.7%, for up to 41.37 billion naira ($208 million). However, on a current basis, the tender offer is at a premium of 75%, as noted by a consumer goods analyst at a major Nigerian bank. Diageo will instead focus its resources to continue to support Guinness Nigeria. The liquor giant reiterated its positive outlook on the country for the long term, and believes it to be a key strategic market for Diageo.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Diageo.

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