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Diageo set to pick up 15% in United Spirits

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Meeting in New York today.

, the global drinks leader.

Mallya and his senior team comprising UB Group CFO , USL President and Managing Director Vijay Rekhi and USL CFO P A Murali will be meeting Diageo counterparts tomorrow in New York for the stake sale.

"The deal is inching towards finalisation," a source said, but the official spokesperson declined to comment.

"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," a Diageo spokesperson said.

Meanwhile, Mallya told television channels: "Yes, I don't deny a meeting with Diageo in New York on Wednesday. There are several other interested players also," adding any strategic player would see USL as a route to market. Mallya also said the group is open to selling up to 14.9 per cent of a total of 17 per cent of treasury stocks in USL to strategic partners. "When they approached us, the share price of USL was Rs 1,800. Why they should not be interested in the current value", he added.

Shares of United Spirits closed at Rs 496.50, up 3.82 per cent, on the Bombay Stock Exchange on Tuesday.

BS Reporter adds:
Sources familiar with the developments said the UB Group is expected to raise around Rs 1,500 crore by divesting close to 15 per cent stake. This close to 15 per cent stake is being held as treasury stock.

The sources also said the deal may get tangled up in protracted negotiations on valuations. As recent as three months ago, USL stock was trading at around Rs 1,300 and at the end of trading on Tuesday, the stock closed at Rs 490. Sources in the company indicate that the company will be comfortable in structuring the deal at around Rs 1,000 per share.

During the past 10 days, the United Spirits stock price has been dropping after investors got to know that this 13 per cent stake in addition to another close to 5 per cent stake has been pledged to various financial institutions to raise close to Rs 3,000 crore. USL had raised this debt to part-fund its acquisition of Scottish spirits firm Whyte & Mackay.

Compounding this was also the fact that USL’s net profit for the third quarter dipped 65 per cent accentuating concerns that the company many not be able to meet its debt obligations. Industry analysts however indicate that the UB Group has over the decades relied heavily on debt and has been effectively managing the show.

USL is leveraged almost three times on its equity of Rs 2,500 crore and has cumulative debt of Rs 7,100 crore.

“With the approval of the financial institutions we can always take back the pledged share which has been given as collateral and divest the 13 per cent stake to the strategic investor. This will obviously help us retire some of the debt,” an USL official said. The promoters of UB Group currently hold close to 37 per cent stake in United Spirits.

This move by United Spirits to work with a global spirits major follows on the lines of United Breweries, the beer arm of UB Group, in which UK-based Scottish & Newcastle (S&N) picked up 37.5 per cent stake in United Breweries. This stake has now passed on to Heineken after they acquired S&N globally.

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