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Diageo-USL deal: Experts say open offer premature

Shares of USL has rallied nearly 50% from Diageo acquisition price of Rs 1,440 to touch a high of Rs 2,149 on Nov 29

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The open offer announced by the acquirer in the recently announced Diageo-United Spiritis Ltd. (USL) deal has not been triggered. It has been announced pre-maturely, say legal experts, and open offer price will have to be revised. 

Stockholders Empowerment Services (SES), a proxy advisory firm run by Securities and Exchange Board of India's former executive director J N Gupta says, the offer is yet to be triggered under Takeover Regulatons and also the offer price of Rs 1,440 will have to be revised.

The share price of has rallied nearly 50 per cent from acquisition price of Rs 1,440 to tough a high of Rs 2,149 on stock exchanges on November 29. If the open offer price is revised after the recent rally in share price, acquisition cost for Diageo would rise. There is a clause in the deal which gives the UK company the first right to withdraw from the deal, say legal experts.  

Diageo, the world's largest spirits maker, agreed to pick up a majority stake in Vijay Mallya group's USL through a multi structured deal. In a joint statement in November, Diageo said it entered into an agreement with United Breweries Holdings Limited (UBHL) and USL to acquire 27.4 per cent stake in the latter at Rs 1,440 per share.

As per announcement, Diageo will acquire 19.3 per cent stake in USL from UBHL group. Diageo will further seek approval from USL shareholders for a preferential allotment at Rs 1,440 per share of new shares amounting to 10 per cent of the post-issue enlarged share capital of USL. Thus, it is only after the preferential allotment that Diageo's stake in USL will cross the 25 per cent mark, which is the trigger for open offer as per rules.

"In the case of Diageo-USL deal, as of now, there is no preferential offer. It is only in the air. It is a mockery of takeover code to trigger open offers based on contingent contracts or transfer of control for four years. The open offer by Diageo is not in conformity with the Takeover code and misleading," SES said in its report.

J M Financial, the manager to the offer, had said that Diageo Plc will launch a mandatory share tender offer to buy up to 26 percent additional stake in USL from public between January 7-18, 2013.

J M Financial refused to comment on an email questioner sent by Business Standard asking them to reply on the above question of how the open offer was announced pre-maturely when it has not been triggered. 

Acquisition of at least 25 per cent shares or voting rights in target Company triggers open offer under regulation 3 of the Takeover Code. Experts say, open offer will be triggered only if preferential allotment to Diageo goes through. In such case public announcement of open offer is required to be made on the day on which special resolution is passed by the shareholders of USL for allotment of shares. Preferential allotment to promoters requires shareholder approval.

Advocate M S Sahoo, former whole time member with Sebi, said, “It is a serious matter and Sebi should take some decision on this quickly.”

However, Sahoo said mostly Sebi acts when someone raises questions with them directly. 

SES believes since USL share price has shot up sharply from Rs 1,440, the open offer may not be in conformity with regulation 8, specially regulation 8(2)(d) of Sebi’s Takeover Code. “And if price is revised by SEBI, in acquirer’s own words, the transaction may not materialise.”

According to deal announcement, if preferential allotment is not approved, Diageo has agreed to buy additional shares from UBHL to take it to the trigger point for open offer. But this part of transaction would materialise only after failure of preferential allotment.

If preferential issue and open offer do not succeed, Diageo would end of with only 25.1 per cent voting rights. SES says the transaction has a few contingent agreements and If one agreement fails to achieve the desired result, another will be activated.

If USL does not approve preferential issue, UBH will sell further shares to Diageo to increase Diageo’s holding to 25.1%. If preferential issue and or open offer does not succeed, UBH will vote in favour of Diageo in respect of remaining holding. The contingent contract has only temporary effect on voting rights. UBH will vote for Diageo for four years only thereby giving a short-term control to Diageo, SES said.

SES draws attention to another interesting fact in the deal. Public announcement says “Notwithstanding anything contained in the PAA, in the event that on account of the PAA, the Offer Price is revised (or is likely to be revised) upwards, pursuant to any order or direction of Sebi, the Acquirer may elect not to subscribe to the Preferential Shares, in which event the Acquirer shall, save in certain circumstances,not be eligible to acquire the Additional Shares under the SPA.”

This clause has a potential affect of limiting Diageo to have only 19.3% shares in USL, if Diageo elects not to subscribe under PAA and UBH refuses to sell additional shares, says SES.

Therefore, if Sebi were to revise the offer price, trigger for open offer may not happen at all. This is strange as trigger for open offer is irreversible.

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