The UB Group and Heineken NV are proposing to restructure their holdings in the beer business in India. The company at the centre of this restructuring is United Breweries Ltd (UBL), in which the UB Group and Heineken own 37.5% each, with the rest owned by public shareholders.

The restructuring is to ensure that there is only one company selling beer brands, whether it belongs to the UB Group or to Heineken. It will, however, be done in a manner that ensures both promoters retain their current level of shareholding.

In the current phase, an equal joint venture between UBL and Heineken, Millennium Alcobev Pvt. Ltd (MAPL), and its subsidiaries, will be merged with UBL. In the next, Heineken’s stake in Asia Pacific Breweries Ltd’s (APBL) Indian operations, too, will be merged into UBL.

The MAPL merger should have been simple. It has two 100% owned subsidiaries, which could have been merged without issuing fresh shares. It has another 89% owned subsidiary, which could have been merged with minimal dilution. In the next stage, MAPL would have been merged with UBL and only Heineken would need to get fresh shares of UBL. UBL’s 50% stake in MAPL would yield its own shares, which would get cancelled. But that would leave Heineken holding a higher stake.

Also, one of MAPL’s subsidiaries is listed and merging it with the unlisted parent would be difficult. This same subsidiary and another one are also under reference to the Board for Industrial and Financial Reconstruction. That makes the process more complicated.

The resultant merger structure is a slightly complex one. At present, MAPL owns a 100% stake in Empee Breweries Ltd, 89% in Millennium Beer Industries Ltd, or MBIL, (a listed company) and 100% in United Millennium Beer Industries Ltd (UMBL). All three firms will be merged directly with UBL.

Associated Breweries and Distilleries Ltd (ABDL), a separate 100% subsidiary of UBL, will also be merged with it. UBL’s shares will be issued in exchange to shareholders of MAPL, MBIL and Empee. No shares will be issued for the merger of ABDL and UMBL, however.

The end result will be that 15 million new shares of UBL will be issued, with around 8.5 million going to the promoters of UBL. In a typical merger of a subsidiary with the parent, the parent (owner) gets its own shares, which are cancelled. But here, 6.5 million shares of UBL issued through the merger will go to the UBL Benefit Trust, with UBL as the sole beneficiary. These shares are known as treasury shares, which can be sold to raise funds.

The combined promoter stake in the new entity will fall to 73.9% from 75%. The trust will own an additional 2.6% stake, resulting in a combined stake of around 76%. Operationally, UBL becomes a much stronger entity post-consolidation. MAPL owns brands such as Sandpiper and Zingaro and has 10% of India’s brewing capacity. That will get added to UBL’s market share of 50%. MAPL’s fiscal 2010 revenue of 556 crore and earnings before interest, depreciation and tax of 44 crore will all accrue to UBL, compared with 50% earlier. In the next stage, when APBL’s Indian operations too are merged, the consolidation will be complete. The market is seeing increased levels of competition from multinational companies, and the consolidation will boost UBL’s ability to hold on to its majority share.

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