Fate of Mallya?s Diageo deal hangs in balance

With the Bombay High Court allowing lenders to sell the shares pledged by Vijay Mallya?s United Breweries Holdings (UBHL) as well as other group firms, doubts have risen over the R11,000-crore deal structured by the billionaire in November 2012 with the world?s largest spirits maker, Diageo, to sell a stake in United Spirits (USL). With lenders ? who had been given the shares as collateral for loans given to Kingfisher Airlines ? free to sell and several having already sold the shares in the market, Mallya may not be left with enough shares to offer to Diageo in a three-tier transaction.

While a UB Group spokesperson declined to comment, Diageo could not be contacted immediately for its response over the latest development.

As per the deal, of the 27.4% stake that Diageo was to acquire in the first stage, 19.3% was by direct stake from UBHL and certain USL subsidiaries and group trusts. However, with 97.94% shares (35.2 million shares) of Mallya?s 28.1% (35.97 million shares) holding in USL being pledged with lenders and with them starting to sell the shares in the market, he may not not be left with any to offer to Diageo. At Tuesday?s closing price, the pledged shares are worth R6,552 crore.

The only option before him was some relief from the Bombay High Court, which did not come his way on Tuesday. The court refused to grant interim relief to UBHL for a stay on the sale of pledged shares in USL and Mangalore Chemicals and Fertilizers by the State Bank of India-led consortium of banks. The consortium had initiated the sale of shares of USL that were pledged by UBHL as security against the lending of over R7,000 crore to Kingfisher Airlines.

In a hardening of stance after the court refused any relief to Mallya, State Bank of India chairman Pratip Chaudhuri told Bloomberg that it will seize collateral pledged by the company

?The bank has called up the loan and has asked the company to repay,? Chaudhuri said. ?We will invoke all the guarantees and securities that we hold including shares of United Spirits that is pledged as collateral and personal assets of the people who have given the guarantee,? he added.

It remains to be seen as to how Diageo, which had plans to take its stake eventually to 53.4%, completes the transaction.

Investment banking consultants told FE that the deal is poised precariously.

The acquisition was supposed to be a three-step process wherein USL?s promoters UBHL would sell 25.23 million shares or 19.23% of the existing issued share capital of USL to Diageo for Rs 3,632.7 crore. Following this, Diageo was to be given 14.53 million shares via a preferential allotment at a price of Rs 1,440 per share. After the completion of the first two steps, Diageo?s holding in USL was supposed to be 27.4% of the enlarged share capital as a result of the preferential allotment.

The third step of the acquisition, which also now faces headwinds, is an open offer from Diageo to the minority shareholders of USL to acquire 26% shares, which would have taken its final shareholding in USL to 53.4%. The open offer was launched on March 25 with an offer price of Rs 1,440 per share. The open offer will close next week. However, the success of the open offer also remains under doubt as the market price of USL shares far exceeds that of the offer price. The USL share ended Tuesday at Rs 1,859.80 on the BSE, down 1.57%.

?The fresh sale by banks further fragments the ownership of USL shares away from the Mallya-Diageo consortium and makes the process of Diageo?s acquisition that much more tedious,? said Gautam Sinha Roy, vice-president, equity strategy and product, Motilal Oswal Securities.

While the company had pledged a total of 35.2 million shares of USL with various entities, the consortium of 18 banks led by SBI have 2.6 million shares as collateral with them. They have already sold 730,000 shares of USL in three tranches as on Tuesday.

Similarly, the banks have offloaded 10 million shares (pledged to the 18-bank consortium) of the 24.9 million shares of Mangalore Chemicals and Fertilizers that have been pledged to all creditors.

The counsel representing UBHL had argued in court that they were given insufficient notice of just five days before the banks began liquidating the shares. To this, the counsel for the banks stated that the loan agreement mentions five days of notice and hence was not illegal.

?Now there is no restriction on banks to sell further shares that are pledged,? said the counsel for the banks after the court passed the order.

UBHL?s counsel, however, said that the decision to appeal against the Bombay High Court?s judgment will have to be taken by the management.

SBI has the highest loan exposure of around Rs 1,600 crore to Kingfisher Airlines, followed by Punjab National Bank with Rs 800 crore, IDBI Bank Rs 800 crore, Bank of India Rs 650 crore and Bank of Baroda Rs 550 crore.