United Spirits, Diageo set for strategic alliance

United Spirits, Diageo set for strategic alliance

Mumbai: Ending months of speculation about an alliance between the two companies, the world’s largest liquor maker by sales Diageo Plc. is close to inking a deal with the Vijay Mallya-controlled United Spirits Ltd, in an effort to marry the significantly large distribution and distillery network of the Indian partner with the global brand portfolio of the multinational.

The alliance could extend to Diageo acquiring an equity interest in United Spirits at a later stage, two persons familiar with the development and who didn’t want to be named said.

“Diageo can confirm that it is reviewing a possible collaboration with United Spirits. However, there is no certainty at this stage that these discussions will result in a transaction," said Stephen Doherti, director of communications, Diageo, in an email response to Mint’s query.

Vijay Rekhi, president, United Spirits Ltd and Ravi Nedungadi, UB Group director and chief financial officer, declined comment on the partnership with Diageo.

Nedungadi said on Sunday that three or four global liquor firms are in talks with United Spirits for a possible stake acquisition in the Indian company. “The 13.7% treasury stock would be one of the options for divestment if we consider a dilution in the company’s equity. But, the talks haven’t progressed to any conclusion yet."

Treasury stock typically comprises shares bought back by the issuing company. In this case, it was created in 2006 when 18 small and large pure alcoholic beverage firms of the UB Group, including McDowell and Co. Ltd, Shaw Wallace India Ltd and Herbertsons Ltd merged to create United Spirits.

Mallya has previously spoken of a possible distribution-led alliance between his company and a multinational.

If the deal with Diageo is signed, it will be the second such partnership finalized in recent times by a UB Group company with a rival.

Earlier this month, the UB Group’s Kingfisher Airlines Ltd signed an agreement with Jet Airways Ltd to share infrastructure, routes, and purchase fuel together.

Shares of United Spirits closed at Rs778.40 on Bombay Stock Exchange on Wednesday, gaining 5.8% even as the exchange’s bellwether equity index Sensex lost 4.81%.

Since January, the stock has lost 60.91%. During this time, Sensex has fallen 49.87%.

One of the top three distillers in the world, United Spirits has at least 59% market share in India and sells around 66 million cases of liquor (each case has 12 bottles) across 140 brands.

It employs at least 7,500 people, across 67 distilleries and marketing and sales offices.

Two Scottish distilleries— Whyte and Mackay Ltd and Bouvet Ladubay—are its 100% subsidiaries. They were acquired in 2007 and 2006, respectively.

Diageo had a bottling and marketing alliance with McDowell, through the UK company’s then Indian subsidiary United Distilleries and Vintners Ltd that ended in 1999.

Diageo currently has a joint venture with the Delhi-based liquor company Radico Khaitan Ltd for manufacturing its non-premium brands.

According to an analyst with a Mumbai-based foreign brokerage, an equity deal is unlikely at this point as the market conditions are not conducive. “Moreover, no global company will now go ahead with an equity transaction unless it has a strong balance sheet to leverage such a deal," the analyst said, asking not to be named because he is not authorized to speak to the media.