Mumbai/Bangalore: Diageo Plc , the world’s largest distiller by revenue, has agreed to buy a majority stake in Vijay Mallya ’s United Spirits Ltd (USL) for a total consideration of Rs. 11,166.5 crore, offering the Indian liquor tycoon a way out of mounting debt woes even as it gains a strong presence in the Indian market.
London-based Diageo, the maker of Johnnie Walker Scotch whisky and Smirnoff vodka, will acquire some 53.4% of USL, the producer of Royal Challenge and McDowell’s No. 1 whiskies and Romanov vodka, in a complex deal announced on Friday that set months of speculation about the transaction at rest.
The deal entails the direct purchase of a 27.4% stake in USL, including 19.3% promoters’ holding, for £660 million (around Rs.5,742 crore) and the issue of fresh equity, followed by an open offer to buy 26% of the expanded equity from public shareholders at Rs.1,440 per share—the price paid for the direct purchase. JM Financial Institutional Securities Pvt. Ltd started the open offer process on Friday.
“On completion of the share purchases as described above and in the event that the tender offer was fully subscribed, Diageo will hold 53.4% of the enlarged USL share capital at an aggregate cost ofRs.11,166.5 crore,” the companies said in a statement.
The price paid by Diageo represents a 20x multiple of USL’s earnings before interest, tax, depreciation and amortization (Ebitda) for the year ended 31 March.
“It’s a very high multiple for a company in the spirits business. These businesses tend to be more capital intensive than other consumption-driven businesses, where 8x to 10x multiple of Ebitda is the norm,” said an investment banker who did not want to be identified.
The transaction was announced after the close of trading on Friday. USL shares rose 1.22% to Rs.1,359.70 at the close of trading after gaining as much as 6.1%, as investors cheered media reports of the imminent deal. Diageo advanced 0.6% to 1,799 pence as of 11.14am in London.
Mallya’s United Breweries Holdings Ltd will be left with a shareholding in USL amounting to 14.9% of the current share capital, said a statement issued by the two firms.
“The deal is a game-changer for both companies. It will improve USL’s cost and capital structure (by reducing debt), and its ability to brand. Diageo are masters at branding. For Diageo, it’s simple—the deal gives access. This could potentially be a road map for them to dominate the Indian spirits industry,” said Sunita Sachdev, an analyst at UBS.
The sale will help Mallya, 57, reduce debt at his UB Group of companies that had amounted to Rs.22,999.11 crore as of 31 March, according to Mint research, and pare interest costs.
In the initial phase, USL will get Rs.3,300 crore of the proceeds and United Breweries Holdings Rs.2,400 crore, Mallya said in a conference call. He said USL will use the money to reduce its debt, which he said amounted to Rs.8,300 core.
As for ailing Kingfisher Airlines Ltd, which has been grounded by the aviation regulator and has $2.5 billion (Rs.13,575 crore) of liabilities, Mallya said it would be “unfair for me to comment now what this deal means to Kingfisher”.
“I am doing what is best for my businesses,” Mallya said. “I believe that I have done what is best for my spirits business. I will be doing what is best for Kingfisher Airlines separately, and I would be doing (it) fairly and squarely.”
Mallya will continue as chairman of USL and United Breweries Holdings, and he will “work with Diageo to build the USL business as the current consumer trends for premiumization accelerate in India”, said the company statement.
For the UK distiller, the transaction would help reinforce its presence in India, a nation of 1.2 billion people that’s also the world’s largest consumer of whisky, Bloomberg reported.
Retail sales in India’s whisky market are expected to grow to $31.1 billion in 2016, from $21.1 billion in 2011, according to Euromonitor International estimates, Bloomberg said.
“...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,” Diageo’s chief executive officer (CEO) Paul S. Walsh said.
The transaction was complex and involved a “unique strategic asset”, said a person associated with the deal, who did not want to be identified.
“When the talks had initially started, the stock price was about Rs.600, now Diageo is offering Rs.1,440 a share. Diageo is offering a huge premium for USL and considers it a unique strategic asset,” he said.
Deepak Roy in a management buy-out and renamed Triumph Distilleries, which was acquired by Mallya in 2005.
“Diageo is paying a huge premium for the business, which it could have made itself over a couple of decades in India since it first started an IMFL joint venture in 1998,” said Roy, an industry veteran, and executive vice-chairman and CEO of Allied Blenders and Distillers Pvt. Ltd, the country’s second largest liquor maker.
Diageo is betting big on emerging markets. Recently, the UK distiller acquired premium Chinese liquor maker Sichuan Swellfun Co. Ltd for Chinese yuan 6.4 billion (around Rs.5,505 crore today).
“It’s a vehicle for them to get into the Indian market. India is a strategic market for them. Globally, they have acquired strong local players,” the person associated with the Diageo-USL deal said.
The company has no plans to take its ownership to 100%, said Diageo chief financial officer Deirdre Mahlan.
“If you look at emerging market transactions in the consumer space, this multiple is not out of line,” Mahlan said. “There is no doubt that India is one of the most exciting, if not the most exciting market in Asia. So the multiple reflects the value we can deliver.”
The two companies first disclosed that they were in discussions in September.
Diageo and Mallya also entered an in-principle agreement under which they will form a 50:50 JV that will own “United National Breweries’ traditional sorghum beer business in South Africa”, Diageo said.
The transaction is one of the largest inbound merger and acquisition deals in India in the past year. In December 2011, Cairn Energy Plc completed the sale of a 40% shareholding in Cairn India Ltd to Vedanta Resources Plc for approximately $5.5 billion in cash.
On Friday, USL also reported a 74% plunge in net profit from the year-ago period to Rs.39.3 crore for the September quarter on the back of marginally lower revenue, and higher input and interest costs. The company said net sales rose 20% to Rs.2,237 crore.
C.H. Unnikrishnan in Mumbai and Bloomberg contributed to this story.