Diageo set to take over Mallya’s United Spirits in Rs 11,166-cr deal

Diageo
There's finally hope for Kingfisher Airlines and Vijay Mallya's UB group. Diageo Plc, the maker of Johnnie Walker Scotch, will buy a 53.4 per cent stake in United Spirits Ltd for Rs 11,166.5 crore (around $ 2.04 billion), providing Vijay Mallya a breather from the woes of grounded Kingfisher Airlines and setting the stage for a possible comeback.

In the biggest inbound acquisition deal after UK's oil firm Cairn Energy sold a majority stake in its Indian business to Vedanta Resources Plc last year, the UK firm and UB group firms — United Breweries (Holdings) Limited and United Spirits Limited — have signed an agreement under which Diageo would acquire a 27.4 per cent stake in USL, the leading spirits company in India. The consideration will be Rs 1,440 per share and the total cost for this stake would be Rs 5,725.4 crore (around 660 million pounds). Mallya will continue in his current role as chairman of USL, and UBHL and he will work with Diageo to build the USL business.

Diageo has also announced that it will launch a tender offer to the public shareholders of USL to acquire, at a price of Rs 1,440 per share, a maximum of 3.77 crore shares, which equates to 26 per cent of the enlarged share capital of USL.

On completion of the share purchases and in the event that the tender offer were fully subscribed, Diageo will hold 53.4 per cent of the enlarged USL share capital at an aggregate cost of Rs 11,166.5 crore (around 1,285 million pounds).

Mallya, chairman of the UB Group, said: "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. 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." UB group shares rose by up to 5 per cent after the deal.

Banks which have given a loan of Rs 7,000 crore to Kingfisher are now hopeful of a comeback by the airline and recovery of their dues. "From the perspective of money coming to the promoters and the holding company, it augurs well for the airline. There can only be an upside for the airline from here on. Kingfisher needs capital and where the money comes from, we are completely agnostic," SBI chairman Pratip Chaudhuri said.

In the two-layered deal that will give the world's biggest spirits group a larger slice of the fast-growing India market, Diageo will acquire a 19.3 per cent stake in USL at a price of Rs 1,440 per share from the UBHL group, the USL Benefit Trust, Palmer Investment Group Limited and UB Sports Management (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees). Following this disposal, the UBHL group would continue to have a shareholding in USL amounting to 14.9 per cent of current share capital.

The shareholders of USL will then be asked to approve the preferential allotment to Diageo at a price of Rs 1,440 per share of new shares amounting to 10 per cent of the post-issue enlarged share capital of USL.

Diageo and Mallya have entered into a memorandum of understanding under which they will form a 50:50 joint venture which will own United National Breweries' traditional sorghum beer business in South Africa. Diageo's investment for its 50 per cent interest in the joint venture is expected to be approximately $ 36 million, subject to adjustment. Diageo and Mallya are also considering the possibility of extending this joint venture in order to maximise opportunities which exist in certain emerging markets in Africa and Asia (excluding India).

Paul S Walsh, chief executive of Diageo, said: "As a result of the agreements we are announcing today 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. USL's number 1 position in local spirits together with our growing international spirits business of leading brands will enable us to grow across the consumer space as India's increasing number of middle class consumers look to enjoy premium and prestige local spirits brands as income levels rise."

However, the completion of the acquisition of shares is subject to the condition of the release of all security interests over the USL shares to be acquired by Diageo. They also include the receipt of mandatory regulatory approvals (including competition approvals) in India and elsewhere. The completion of the acquisition and tender offer is expected to occur in the first quarter of 2013. Diageo will fund the acquisition through existing cash resources and debt. Diageo believes that its financial strength supports its current single A credit rating and will hold discussions with the rating agencies as a consequence of this announcement.

Analysts expressed optimism about the deal. "Some of the Mallya group companies have been in turbulence for some time. This is his final opportunity to revive the fortune of the group," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors.

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