Competition Commission to look into Diageo, USL merger

Bangalore/MumbaI: India’s antitrust body has sought more details on the acquisition of United Spirits Ltd (USL) by Diageo Plc, delaying the closure of a deal that is expected to ease the debt burden of the UB Group of which the former is a part, and help the conglomerate’s chief Vijay Mallya pump in money to revive the now-grounded Kingfisher Airlines Ltd.

add_main_imageIndia’s stock market regulator had earlier expressed concerns about the deal, according to a media report.

In November, Mallya struck a deal valued at $2.1 billion (around ₹ 11,450 crore today), including the cost of purchasing shares held by the public, to sell 53.4% in USL to Diageo. The UK firm was to acquire 19.3% from the group’s holding company, and while neither Mallya and the group have said anything about how the proceeds of this are to be used, it has been generally believed that some of the money could find its way to Kingfisher Airlines.NextMAds

USL controls over half of India’s 250 million cases liquor market and owns brands such as McDowell’s No.1 and Bagpiper. An official at the Competition Commission of India (CCI) said the antitrust body had sought more details from the companies to ensure that the deal wouldn’t create a monopoly.

“We need to determine if there are enough alternatives for consumers,” added this person, who did not want to be identified.

The official said CCI would rule on the deal once it gets the information sought, which includes prices and shares of the company’s products and those of its rivals.

Two UB Group executives, who spoke on condition of anonymity, confirmed that the antitrust body has asked for more details.

The CCI official explained that the application from the companies has not entered the so-called Stage Two, which would entail a detailed investigation and also discussions with customers, rival liquor companies and independent agencies.

Officials at USL and Diageo declined to comment.sixthMAds

The antitrust body’s query comes even as stock market regulator Securities and Exchange Board of India (Sebi) has expressed concern about the structuring of the deal, Business Standard newspaper reported on 10 January.

The report cited an unnamed Sebi official as saying that the regulator is worried about a clause that gives Diageo the right to withdraw from the open offer to buy shares from the public if the offer price is revised upwards.

Since the Competition Act came into force in June 2011, CCI has cleared around 100 merger applications it has received in the so-called first stage itself. On average, the body has approved mergers in three weeks, the CCI official said. According to the Act, the competition regulator has to respond to proposals within 210 days, after which the proposal is deemed to have been automatically approved.

Competition law experts said that while CCI will closely scrutinize the proposed merger, it will likely approve the proposal given Diageo’s low market share in India.

London-based Diageo, the maker of Johnnie Walker Scotch whiskey and Smirnoff vodka, has failed to make a mark in India after it started operations in 1993. It controls less than 3% of the market and lags behind its biggest global rival Pernod Ricard, which is the most profitable distiller in the country. The combined market share of USL and Diageo would be less than 60% in India.

This is one of the biggest deals brought to CCI, said lawyer Anand Pathak, an expert on mergers and acquisitions and competition law, who believes the regulator will approve the deal.

“It does not really make a big difference to the industry if a player has 55% of the market or 57-58%,” Pathak said.

“The main thing is that the combined market share of the companies (that are proposing to merge) should not be so enormous that it will be unhealthy for the market,” said Vinod Dhall, a former acting chairman of the antitrust body. “The combined company should not be able to dictate terms to suppliers, retailers, distributors and, of course, to the end consumer. Competition law is as much B-to-B (business-to-business) as it is about B-to-C (business-to-consumer),” he said.

Diageo has said it expects to complete the transaction in the first quarter of this year.

If regulators clear the deal, USL and Diageo are not the only companies that may benefit. Creditors of Kingfisher Airlines, which has liabilities of more than $2.5 billion, have been hoping that UB will use some of the money it gets towards repayment of the airline’s debt, even though Mallya hasn’t specified this. Kingfisher, which has been grounded since October, lost its operating licence just before the turn of the year and has delayed paying salaries for several months.

When the USL-Diageo deal was announced in November, Mallya said it would be “unfair for me to comment now what this deal means to Kingfisher”.

The deal involves the direct purchase of a 27.4% stake in USL, including 19.3% promoters’ holding, for £660 million (around ₹ 5,790 crore today) and the issue of fresh equity. Diageo would follow this with an open offer to buy 26% of USL from public shareholders at ₹ 1,440 per share—the price paid for the direct purchase.

USL stands to get ₹ 3,300 crore, which will be used to reduce its debt of more than ₹ 8,000 crore, and Mallya’s holding company will get ₹ 2,400 crore from Diageo.

Mallya can use the money to get Kingfisher flying again. Kingfisher’s bankers, owed roughly ₹ 7,000 crore, want ₹ 800 crore immediately, while Mallya, in a plan submitted to regulators earlier in January, promised to pump in ₹ 650 crore by the summer to enable a limited restart of the airline. Analysts previously said Kingfisher needs between ₹ 3,000 crore and ₹ 5,000 crore to fly again in any meaningful way.

A core group of Kingfisher’s bankers is slated to meet on 18 January, possibly to take a final call on the airline’s debt, which is backed by Mallya’s stakes in other UB companies, his properties and personal guarantees, among other things.

Kingfisher’s bankers, which have been accused of being too generous to UB, recently indicated that they are ready to start liquidating Mallya’s assets soon in the absence of a firm commitment by the liquor baron on fund infusion.

“We have waited for long. We will have to start recovery procedures in case the promoters are not showing the willingness to provide money. Neither bankers nor DGCA (Directorate General of Civil Aviation) are convinced by the fresh revival plan submitted by the airline. We need assurance for money,” a senior banker said earlier this month, speaking on condition of anonymity.

Vyas Mohan in Mumbai contributed to this story.