Mumbai/Bangalore: The Karnataka high court on Friday annulled the sale of a stake in United Spirits Ltd (USL) to Diageo Plc by United Breweries (Holdings) Ltd (UBHL), complicating a transaction sealed in July to turn the UK distiller into India’s biggest seller of whiskey.

The verdict, besides posing a hurdle to Diageo’s bid to become the controlling shareholder in India’s largest liquor company, raises the stakes in the UB Group’s fight for survival. It may also increase the cost of acquisition and pull down the stock price of USL, analysts and legal experts said.

The high court order came in response to a winding-up petition brought by creditors of UBHL, the holding company of Vijay Mallya’s UB Group, which according to the company’s latest annual report, has extended corporate guarantees worth 8,925.86 crore to lenders of troubled group affiliate Kingfisher Airlines Ltd. The proceedings related to the winding-up petition against UBHL will continue in the high court.

Friday’s order marks the reversal of another verdict passed by the same court in May when it gave conditional approval to UBHL to sell its shares to Diageo.

To be sure, the UB Group and Diageo are likely to file an appeal in India’s Supreme Court.

“(The order) adds seriousness to the winding-up petitions against UBHL. It shows that the lenders have merits in the winding-up petitions that they have filed," said Aparajit Bhattacharya, a partner at HSA Advocates, a law firm. “If the case goes to the Supreme Court, we’re talking of senior Supreme Court counsels getting involved, so that will significantly increase the legal cost budgeting for UB."

The UB Group said it was studying the judgement and would consider its options.

“The judgement is in excess of 150 pages, which requires us to first study it after a copy is made available to us, and thereafter, consider our options," Prakash Mirpuri, a spokesman for the UB Group, said in an email. “Till then, we are unable to comment in any greater detail, except to say that one of the obvious options that we have is to prefer an appeal before the Supreme Court when it reopens in January."

UB Group chairman Mallya said: “We will take all necessary steps to protect Diageo’s interests as well as our own."

A Diageo spokesperson said the company will appeal the high court order.

“We are awaiting receipt of the detailed written order of the division bench of the Court of Appeal in Karnataka announced in court today. We do not believe that there are any grounds for declaring the sale of the 10,141,437 shares in United Spirits (6.9% of USL) purchased by Diageo on 4 July 2013 from UBHL as void," said a Diageo spokesperson.

“We are also disappointed, as a bona fide purchaser for value of the United Spirits shares, that we have been brought into the private dispute between Kingfisher Airlines and its creditors. Once we receive the full written order of the Court of Appeal, we will review the detail of that order. We confirm that we intend to appeal the matter further," the spokesperson added.

In July, Diageo completed its takeover of USL, nearly eight months after the companies announced the transaction. UBHL and other promoter companies sold a 14.98% stake in USL for £344.19 million to Diageo. UBHL’s stake sale represents some 7% of USL’s current shares.

“It is possible that if a winding-up order were to be passed in respect of UBHL, Diageo could lose title to the 10.14 million USL shares acquired today from UBHL," it had said.

Diageo is currently the largest shareholder in USL with a 26% stake, much lower than the 53.4% it originally sought, while UBHL and other promoter firms own 11.08%.

On 9 November 2012, Diageo agreed to buy a 53.4% stake in USL for about 11,166.5 crore as it sought a bigger market share in India. The transaction included the purchase of a 19.3% stake from UBHL and fresh preference shares from USL. The British distiller was to buy the remaining 26% from the public shareholders of USL.

The largest-ever deal in the Indian liquor industry had been expected to be completed by 31 March, but it was held up by the Competition Commission of India and the Securities and Exchange Board of India; the regulators sought more details on the deal structure and antitrust issues.

It was further delayed by a petition filed by creditors to Mallya’s Kingfisher Airlines to wind up UBHL; they tried to stop the UB Group’s holding firm from selling the stake to Diageo.

Diageo’s open offer to shareholders also failed and the company announced in May that it bought less than 0.5% of USL shares, which are trading at a significantly higher price than what the UK distiller had offered to public shareholders.

The companies finally obtained all the required regulatory and legal clearances by June.

“(Friday’s order) is a big negative for USL and Diageo. This makes the deal very complicated for Diageo and I expect the USL stock price to correct sharply," said Nitin Mathur, an analyst at Espírito Santo Securities.

USL is by far the largest asset of the UB Group.

This year, Mallya has been losing part of his ownership in UB Group companies, including United Breweries Ltd and Mangalore Chemicals and Fertilizers Ltd, as lenders to Kingfisher Airlines and other UB Group companies have sold hundreds of crores worth of pledged shares to recover their borrowings.

All operational UB Group companies, except for UB Engineering Ltd, have different majority shareholders—and in each case, Mallya has ceased being the single largest shareholder some time in the past year.

Over the past month, the Karnataka high court has admitted two winding-up petitions filed by lenders against UBHL, and Friday’s order marks an escalation in the legal battle against the UB Group.

Shares of UBHL slipped 0.60% to 24.70 apiece, while those of United Spirits added 0.97% to 2,670.55 apiece on BSE on Friday.

The high court verdict came after market hours.

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