Diageo takes 53.4% stake in United Spirits for $2.1 bn

Written by fe Bureau | Bangalore | Updated: Nov 10 2012, 09:58am hrs
Vijay MallyaUB Group chairman Vijay Mallya shakes hands with Diageo COO Ivan Menezes after inking the deal on Friday.
The worlds largest spirits maker Diageo has finally entered India, the worlds largest market for whisky, by agreeing to buy 53.4% stake in Vijay Mallyas United Spirits for R11,166 crore ($2.1 billion). Though Mallya will lose control over the company once the transaction is complete, he will remain its chairman. The transaction will be the biggest inbound deal in recent times after the $9-billion investment by BP in Reliance Industries and the $8-billion Vedanta Resources acquisition of Cairn India last year.

I have not sold the family silver; I have only embellished it, Mallya told reporters on a conference call after the deal was announced. The seeds of this partnership were sown six years ago and I am delighted to say we are equally proud that it has come to fruition, he said.

Both parties, in talks for a long time now, said on Friday that the deal would be structured into two phases. In the first phase, Diageo, which makes some of the finest scotch whisky brands like Johnnie Walker and Smirnoff Vodka, will acquire a 27.4% stake in USL for R5,725 crore at R1,440 per share.

Of the 27.4%, 19.3% will be acquired directly from United Breweries Holding Ltd (UBHL) and certain USL subsidiaries and group trusts. The balance will come through a preferential allotment of new shares by USL shareholders to Diageo at R1,440 per share, amounting to 10% of the post-issue enlarged share capital of USL.

Once the share purchase is completed, Diageo will make the mandatory open offer for acquiring another 26% of the equity, taking its stake to 53.4%. The open offer will also be at R1,440 per share, a joint statement by the two sides said. After the deal, UBHL will continue to hold 14.9% in USL. The final amount of R11,166 crore represents a valuation of 20 times USLs Ebitda for the fiscal 2011-12.

As a result of the stake sale, USL will get R3,300 crore, which will go towards retiring its current debt of R8,300 crore, while the group holding firm UBHL will get R2,400 crore.

Mallyas USL, with Indian-made foreign liquor brands like Bagpiper and Royal Challenge and a scotch brand Whyte & Mackay, which it bought in 2007 has the largest market share in the whisky segment. By acquiring majority stake in it, Diageo has got the perfect vehicle to expand its presence in the Indian market.

Diageo had initiated talks with Mallya in 2008 also for this acquisition, but talks had failed over some disputes relating to valuation. The gain for Mallya through this deal is that it provides him with cash to reduce the debt of USL as well free up funds to revive his ailing Kingfisher Airlines.

A deal at this time was crucial for Mallya because around 94.42% of his shares in USL are pledged as collateral for loans and if his airline company sinks, the shares could be at risk. Further, with funds at hand, Mallya stands a chance to save his airline as the government has recently allowed foreign carriers to pick up to 49% stake in Indian airline companies.

However, Mallya did not link the USL stake sale to the revival of Kingfisher. We will address Kingfishers problems fairly and squarely. The holding company will decide on a rehabilitation programme separately, he said. We have multiple businesses and each business operates independent of each other. There is no cross-contamination, there never has been, there never will be. I had done what I thought best for my beer business, I have now done what I think is best for my spirits business.

Kingfisher Airlines, which has never turned in a profit since inception in 2005, reported a net loss of Rs 754 crore in the September quarter against the Rs 468 crore it reported a year ago.

Commenting on the proposed deal, Diageo Plc chief executive Paul S Walsh said: The combination of USLs strong business with the capabilities which Diageo brings as the worlds leading premium drinks company will ensure that USL continues to lead the industry in India.

The day saw the share prices of various Mallya group firms closing up, which has been the trend for the past few days with news out that the deal with Diageo was set to be announced. Shares of UBHL on the BSE closed up 3.34% at Rs136.05. United Spirits closed up 1.22% at Rs 1,359.70 while Kingfisher closed up 4.97% at Rs 13.53.

Meanwhile, Mallya also entered into a memorandum of understanding with Diageo to form a 50:50 joint venture, which will run United National Breweries, a traditional sorghum beer business owned by Mallya in South Africa. Diageos investment in this would be $36 million.

For his other liquor venture United Breweries which manufactures beer and commands the largest market share Mallya already has a foreign partner, with Dutch major Heineken holding an equal 37.5% stake. At one point of time, Mallya was even considering selling part of his stake to Heineken to raise money but later dropped the idea.