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ABUJA/LONDON (Reuters) - Diageo (DGE.L) has scrapped plans to lift its stake in Guinness Nigeria (GUINNES.LG) due to tough conditions in one of its biggest markets for the world-famous stout, the drinks company said on Wednesday.
The decision by Diageo, which makes Johnnie Walker Scotch and Smirnoff vodka, is another blow to Africa's biggest economy which is headed for its first full-year recession in quarter of a century following a plunge in oil prices.
Diageo said last year it planned to buy 15.7 percent of Guinness Nigeria for up to 41.37 billion naira, which would have taken Diageo's stake to 70 percent.
While the naira has since slumped after the central bank lifted a currency peg in June, Guinness Nigeria shares have also fallen to trade well below the price Diageo offered last year.
The company said on Wednesday it would not proceed with the offer, choosing instead to focus its resources on continuing to support Guinness Nigeria.
Last month, Diageo granted Guinness Nigeria a $95 million loan facility to help it cope with dollar shortages. The Nigerian subsidiary has only used $30 million so far.
Limited access to foreign currency has contributed to some businesses pulling back from Nigeria due to difficulties repatriating income. International carriers United (UAL.N) and Iberia both stopped services to Nigeria earlier this year.
Diageo is predominantly a spirits company, but says that owning Guinness beer helps its footprint in Africa, where a growing number of middle class consumers are drinking more.
Guinness Nigeria shares, which have fallen 19 percent this year, were flat at 93 naira on the Lagos bourse on Wednesday following news that Diageo had scrapped its share tender. Diageo shares were down 1.7 percent.
"The tender offer is at a 75 percent premium from where the stock is trading now," said a consumer goods analyst at a major Nigerian bank. "It will be giving shareholders so much cash now and there is no reason to do that. There is a very strong possibility that they may consider a rights issue."
A source familiar with the company's thinking said a rights issue could be another way to recapitalise the business.
A Diageo spokeswoman declined to comment on such a possibility.
Guinness Nigeria, which is 54 percent owned by Diageo, reported its first full-year loss in 30 years for its 2016 financial year, hurt by the ongoing recession and the currency crisis brought on by the impact of low oil prices.
"Diageo has confirmed that it maintains a positive outlook for Nigeria in the long term and that it expects the market to continue to grow," Guinness Nigeria said in a statement. "Nigeria remains a key strategic market for Diageo."
Nigeria accounted for 3 percent of Diageo's sales of 10.5 billion pounds ($13.4 billion) in its most recent financial year.
Editing by David Clarke