Diageo offers to sell most of Whyte & Mackay, acquired on United Spirits buy, after UK red flag

Written by fe Bureau | Bangalore | Updated: Nov 26 2013, 17:42pm hrs
DiageoAnalysts, who anticipated this situation ever since the Diageo and United Spirits deal was struck last November, reckon that a sale could ease the pressure on USL's balance sheet. Reuters
British liquor giant Diageo has offered to sell most of Whyte & Mackay the Scotch whisky maker it now owns through its acquisition of Indias largest liquor company United Spirits (USL) after the UKs Office of Fair Trading (OFT) raised competition concerns arising from the acquisition. The consumer and competition authority said on Monday that it was studying Diageo's proposal to sell the entire business except two malt distilleries.

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These companies are two of the leading suppliers of blended bottled whisky in the UK, especially to supermarkets and other large retailers. Our investigation considered a wide range of evidence and we concluded that the likely loss of competition could give rise to higher prices for retailers, and ultimately consumers, Chris Walters, OFT chief economist and decision-maker in this case, said in a press release. We are now considering Diageo's offer to sell the bulk of the Whyte & Mackay business with the exception of two malt distilleries, to address our concerns.

Analysts, who anticipated this situation ever since the Diageo and United Spirits deal was struck last November, reckon that a sale could ease the pressure on USL's balance sheet brought on by the Whyte & Mackay purchase in 2007. USL had a net debt of Rs 7,167 crore as on September 30, after repaying as much as Rs 1,857 crore from the proceeds of the issue of preference capital and the sale of shares to Diageo.

Vijay Mallya had bought Whyte & Mackay (W&M) for 595 million pounds sterling in 2007, a move which gave USL access to large Scotch reserves for its blended whiskies. He also swung the distiller's focus over the last five years towards reducing the bulk spirits business and developing its own brands such as Dalmore and Jura. It (W&M) has not been very profitable. If they can monetise the assets and reduce debt, it will be good for USL, said V Srinivasan, research analyst with Angel Broking.

Diageo had completed its acquisition of 25.02% stake in USL for Rs 5,235 crore in July, giving it control over W&M. The British firm had said last week that it could not acquire an outstanding 2.38% stake within Sebi's prescribed time frame as it was facing an issue over getting these shares released from the pledge holders. USL has now moved the Karnataka High Court seeking relief.

A number of retailers expressed concerns to the OFT about possible price rises for bottled blended whisky sold in the UK as a result of the merger. The OFTs investigation found that there is substantial competition in the retail sector between Bell's whisky, a Diageo label, and Whyte & Mackay's own-label and branded blended whisky, said the OFT release. After analysing evidence, including data on consumer switching between brands, economic modelling and internal documents, the OFT found the merger may lead to a substantial lessening of competition in the supply of blended whisky to retailers. The evidence showed that other manufacturers did not have, and could not quickly reach, sufficient capacity to offset the loss of competition likely to result from the merger, it added.

Diageo has proposed to keep the Dalmore and Tamnavulin malt distilleries while selling off three other assets, including the Invergordon distillery, which is among Scotland's largest grain distilleries.

While the undertakings in lieu are being considered, the OFT's duty to refer the merger to the Competition Commission is suspended, said Walters, referring to the rules that allow for remedying, mitigating or preventing the substantial lessening of competition concerned. The OFT said it is required to consult publicly on draft provisional undertakings prior to taking a decision to accept such undertakings.