This week, SABMiller (SAB) announced that it will divest its almost 40% stake in South African hotel and casino operator Tsogo Sun Holdings. The sale should raise about $1 billion in cash. We regard the move as value-neutral, as we do not believe it moves the needle on our fair value estimate, but we think the strategy of shedding this business to focus on core operations in Africa, the source of SABMiller's wide economic moat, will strengthen the firm's ability to generate excess returns on invested capital in the future.
The announcement that the equity holding in Tsogo will be sold does not come as a surprise, as the firm announced in April 2014 that it was considering strategic options for its investment. We are intrigued, however, by CEO Alan Clark's comments that proceeds from the sale would be reinvested in "(our) core growth business, including our African operations." We think this reallocation of capital to the core business in Africa could enhance the company's competitive advantage by growing scale and lowering average cost of production in a region in which it already possesses a strong cost advantage.
With an existing $2 billion in cash on its balance sheet, the sale of its investment in Tsogo will give a SABMiller significant war chest for growing the business. We expect SABMiller's top priority to be to defend its share against the encroachment of other multinational companies with an eye on Africa, such as Diageo and Heineken, so it could increase research and development and marketing expenditure.
Second, with whitespace opportunities still available, bolt-on acquisitions could be a value-added use of the cash. For example, the firm is the number one brewer in Mozambique, Zambia, and Botswana, but has little presence in Zimbabwe, a nation encircled by those three countries. We believe that plugging gaps such as this could deliver medium-term increasing returns to scale in SABMiller's African business, thus fortifying the firm's wide economic moat.