Diageo Plc of the UK is set to pick up a 51% stake in Vijay Mallya-promoted United Spirits Ltd in a complex deal that is expected to be announced today.
Shares of United Spirits gained as much as 6.1% to Rs.1,425 in early trade on BSE on Friday. The stock was trading at Rs.1,373.25 at 10:56am, up 2.23%, while the benchmark Sensex was flat at 18,852.09.
The deal will involve a direct purchase of a portion of the promoters’ holding, an issue of fresh equity and an open offer to buy stock from public shareholders. India’s takeover code says that any entity buying a 25% stake in a company is required to make an open offer.
The deal size is likely to be about $2 billion (around Rs.10,820 crore), according to two UB Group executives and two investment bankers, none of whom wanted to be identified. It is likely to be announced later this week, they said on Monday.
Mallya will continue to remain chairman of United Spirits, and another UB Group executive will be named president. Currently, Ashok Capoor of UB Group is the managing director (MD) of the company.
Diageo will nominate the MD and the chief financial officer (CFO).
UB Group spokesman Prakash Mirpuri declined comment on Monday.
“As a matter of policy, we are not commenting any further than the following statement we issued on 25 September, 2012,” a Diageo spokesperson said Monday.
On 25 September, Diageo and United Spirits had issued a joint statement confirming that Diageo is in discussions with United Spirits and United Breweries (Holdings) Ltd in respect of possible transactions for Diageo “to acquire an interest in United Spirits Ltd. However, there is no certainty that these discussions will lead to a transaction”.
It is not clear what stake Mallya will have in United Spirits after the deal and whether it could mean an infusion of funds into his beleaguered Kingfisher Airlines Ltd.
The promoters hold a 27.78% stake in United Spirits; the public holding in the firm is 29.63%.
Recently, Diageo acquired premium Chinese liquor maker Sichuan Swellfun Co. Ltd for Chinese yuan 6.4 billion.
In 2011, Diageo completed the most acquisitions for any spirits group in the industry. Diageo was particularly aggressive in emerging markets, where it completed three purchases.
As further consolidation takes place in the liquor business, large strategic buyers will become more aggressive in the pursuit of acquisitions, using their strong cash positions to pursue sales growth, access to new markets, increased margins and potentially higher share value, according to a 2012 report by Winchester Capital Research.
Global alcohol consumption is expected to reach $230.3 billion in value by 2014, a 46% increase over 2005 and a 9.5% increase over 2010, the report said.
The Asia-Pacific region accounted for nearly 39% of global consumption value in 2011 and is expected to account for approximately 41% by 2014, indicating that the developing economies and middle classes of Asian countries will continue to be a growth market for major spirits companies and areas where these enterprises concentrate merger and acquisition and marketing activities.
Large liquor companies with extensive cash reserves have shifted their focus from the mature markets of Europe and the US to faster growing emerging markets, particularly Brazil, Russia, China and India.
The deal with Diageo will also help United Spirits, said an analyst.
“United Spirits would be able to cut its debt if the deal goes through and it will boost the profitability of the company by 50% as the interest expenses are too high,” Ganesh Ram, a senior analyst at international brokerage firm Kim Eng, a unit of Maybank Investment Bank Bhd said Monday.
“The market will re-rate the United Spirits stock as it will get a portfolio of premium brands. For Diageo, this acquisition will give a strong distribution network in India, where it has negligible market. The deal will be a big boost for Diageo as the UB Group controls 50% of the Indian spirits market,” he said.
Ram is not sure whether the deal will see an infusion of funds into UB Group-promoted Kingfisher Airlines.
As on 31 March 2012, UB Group companies had debt of Rs.22,999.11 crore, according to Mint research. United Spirits had Rs.8,443.57 crore of debt on its books, while United Breweries (Holdings) had Rs.3,478.81 crore debt.
Earlier this year, United Spirits completed the acquisition of Sovereign Distilleries Ltd, a producer of extra-neutral alcohol, making it a wholly owned subsidiary.
United Spirits’ exposure to subsidiaries in the form of outstanding guarantees rose significantly from Rs.450 crore in fiscal 2012 to Rs.3,840 crore, catapulting total exposure to subsidiaries to Rs.10,040 crore, said a 25 October note by domestic brokerage Edelweiss Securities Ltd, authored by analysts Manoj Bahety, Sandeep Gupta and Ashish Gupta.
“Profitability of subsidiaries remained subdued,” the report said. “Outstanding loans and deposits to United Breweries Holdings stood at Rs.410 crore in FY2012 (FY2011 it was Rs.570 crore).”