UPDATE 2-SABMiller selling stake in S.Africa's Tsogo Sun to free cash for beer business

Mon Jul 7, 2014 10:06am EDT

* SABMiller to use some of cash to fund African growth

* Investors expect SABMiller to sell stake at discount

* Tsogo Sun to buyback shares worth $260 mln from SABMiller (Adds analysts comment, valuation data)

By James Davey and Tiisetso Motsoeneng

LONDON/JOHANNESBURG July 7 (Reuters) - SABMiller will sell its $1 billion stake in South Africa's top gaming and hotel group Tsogo Sun, the brewer said on Monday, giving it cash to beef up its African beer business.

The maker of Peroni and Miller Lite beers has been reviewing its 39.6 percent stake in Tsogo Sun as it concentrates on building its beer business in emerging markets, such as Africa, Asia and Latin America.

It has held the stake, now valued at $1.09 billion, since 2002 when it transferred its gaming and hotel assets to Tsogo Sun.

"Gaming and hotels are not core to our operations and we have concluded that the time is right for us to exit our investment through a transaction which is beneficial to shareholders of both SABMiller and Tsogo Sun," SABMiller Chief Executive Alan Clark said in a statement.

The brewer would reinvest the proceeds, including in its African operations, he said.

SABMiller said it would dispose of up to all of its shareholding through a placing of up to 305 million shares to South African and international institutional investors, and a buyback by Tsogo Sun of at least 130 million shares for about $260 million.

Shares of Tsogo Sun, the other 41 percent of which are owned by investment company HCI Ltd, fell 3.35 percent to 26 rand by 1206 GMT, on expectations the stock would be sold to institutional investors at a discount.

"The market knows these institutional investors will only be prepared to take up these shares at a discount to the current price," said Greg Katzenellenbogen, director at Sanlam Private Investments.

SABMiller shares were down 1 percent in London trade.

LIQUIDITY BOOST

Under the share buyback part of the deal, Tsogo Sun would repurchase the stock at no more than 21.50 rand each, about a 17 percent discount to the current price.

For Tsogo Sun, which owns Johannesburg's Montecasino gaming complex and premier hotel brand Southern Sun among other assets, the deal would help boost earnings, improve liquidity in its shares and possibly spark a valuation re-rating, said De Wet Schutte, an analyst at Avior Research.

"It is a stock that has very good qualities but its relatively small float has placed some restrictions on large investors to invest. We believe this deal would assist the valuation of Tsogo Sun," said Schutte.

Tsogo Sun shares should be trading at about 40 rand based on its most likely earnings trajectory over the next five years, according to Thomson Reuters StarMine.

StarMine's valuation model, which uses a blend of analysts' forecasts and its own tools, estimates Tsogo Sun's growth rate is likely to compound at 9 percent a year over the next five years - three times what the market expects.

Tsogo Sun merged with casino and theme park operator Gold Reef in 2011, a deal that saw SABMiller's stake shrink from 49 percent.

Tsogo Sun's management will begin a roadshow on Monday to meet selected institutional investors in South Africa and beyond regarding the placement of shares. The exact number of shares to be placed, and the price, will be determined following a bookbuilding process to take place next week, SABMiller said.

The shares are expected to trade on July 21, with a settlement date of July 28. (Additional reporting by Martinne Geller; Editing by Louise Heavens and Susan Fenton)

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