January 2013

Dealing a shot of good news, international liquor major Diageo, on Friday, announced its decision to acquire 53.4 per cent stake in Vijay Mallya-owned United Spirits Ltd. (USL) for Rs.11,166.50 crore.

Diageo announced from London that it had entered into agreements with United Breweries (Holdings) Ltd. and USL to acquire 27.4 per cent stake in USL for Rs.5,725 crore at Rs.1,440 a share. Shares of USL closed at Rs.1,343.25 on Thursday. UB Holding and associate companies will sell 19.3 per cent stake to Diageo and a large part of this money will directly go to UB Holdings, which will de-leverage its balance sheet.

The board of directors of USL has cleared a proposal to make a preferential allotment of USL shares, amounting to 10 per cent of the company’s enlarged share capital, to Diageo at Rs.1,440 a share. The proceeds from this will go into clearing a part of USL’s debt of Rs.8,300 crore. After this stake sale, the UB Holdings group’s shareholding in USL will come down to 14.9 per cent.

Following completion of these agreements, Mr. Mallya will continue as Chairman of USL, and UBHL. He will work with Diageo to build the USL business in India.

Open offer to buy 26 % stake

Since these agreements trigger the Securities and Exchange Board of India’s takeover code, Diageo will launch an open offer to buy 26 per cent stake from the public at Rs.1,440 a share. The open offer will cost Diageo Rs.5,441 crore. Shareholders need to approve this proposal.

On completion of this process, Diageo will hold a total of 53.4 per cent stake in USL with an aggregate cost of Rs.11,166.50 crore. “It is completely a win-win for both. I am personally very happy that finally the dream has come true,” UB Group Chairman Mr. Mallya said in a conference call with journalists from London. He made it clear that the money generated from this deal would not be utilised to revive Kingfisher Airlines as had been widely speculated.

“I have now done what I think is best for my spirits business and, of course, we will also address the needs of Kingfisher Airlines, but these will be done separately for the good of the company and its stakeholders,” Mr. Mallya added.

“I have had a long association with Diageo and, therefore, I am confident that this winning partnership with Diageo provides USL with the best possible platform for future growth,” he said. “I am delighted to remain part of that journey as Chairman of USL as we work together to build continued value for the shareholders of USL and UBHL,” Mr. Mallya said.

Family jewel?

He denied that he sold his family jewel (USL) “I have not sold my family jewel, only embellished them,” he said.

Diageo’s COO Ivan Menezes said the acquisition USL’s shareholding was fully aligned with the company’s strategy to build its presence in the world’s faster growing markets besides enhancing its position as the world’s leading premium drinks company.

He said UB group’s manufacturing and distribution capabilities and Diageo’s marketing and brand building capabilities would be a unique combination. “As a result of the agreements, we will be well positioned to take the growth opportunities presented by a spirits market where growth is driven by the increasing number of middle-class consumers. The combination of USL’s strong business with the capabilities which Diageo brings as the world’s leading premium drinks company will ensure that USL continues to lead the industry in India,” Paul S. Walsh, Chief Executive of Diageo, said in a statement. Diageo has asked the UB group to release all security interests over USL shares to be acquired by it.

Good News

Analysts said this was the best Mr. Mallya could have done. “He is pushed to the wall to sell stake and there is no other choice. The deal is in line with market expectation and he fetched more money than expected. It is good for the company,” said market analyst Ambarish Baliga.

The entire deal is expected to complete in early 2013. Diageo will fund the acquisition through existing cash resources and debt. Diageo and MR. Mallya have entered into a MoU to form a 50:50 joint venture which will own United National Breweries’ traditional sorghum beer business in South Africa. They are also considering the possibility of extending this joint venture to maximise opportunities in Africa and Asia (excluding India). USL shares closed with a gain of 1.22 per cent at Rs.1359.70 on the BSE. United Spirits’ brands include Royal Challenge, Directors Special, Signature whisky; Black Dog scotch and White Mischief in vodka.

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