The open offer announced by the acquirer in the recently announced Diageo-United Spirits Ltd (USL) deal has not been triggered. It has been announced prematurely, say legal experts, and the 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 the Takeover Regulations and the price of Rs 1,440 will have to be revised.
The share price of USL has rallied nearly 50 per cent from the Diageo acquisition price of Rs 1,440 to touch a high of Rs 2,149 on the stock exchanges on November 29. If the open offer price is revised after the recent rally in the share price, the 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 the 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 Ltd (UBHL) and USL to acquire 27.4 per cent stake in the latter at Rs 1,440 per share.
According to the 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 25 per cent, which is the trigger for the open offer according to 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 the 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 is 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 per cent additional stake in USL from the public between January 7 and 18, 2013.
J M Financial refused to comment on an email questionnaire sent by Business Standard, asking them to reply to the above question, on how the open offer was announced prematurely when it had not been triggered.
Acquisition of at least 25 per cent shares or voting rights in the target company triggers open offer under Regulation 3 of the Takeover Code. Experts say the open offer will be triggered only if preferential allotment to Diageo goes through. In such a case, public announcement of open offer is required to be made on the day on which the 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 Sebi mostly acts when someone raises questions with them directly.
SES believes since the 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 the price is revised by Sebi, in the acquirer’s own words, the transaction may not materialise.”
According to the deal, 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 the transaction would materialise only after failure of preferential allotment.
If a preferential issue and open offer do not succeed, Diageo would end 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 the preferential issue, UBH will sell further shares to Diageo to increase Diageo’s holding to 25.1 per cent. If preferential issue and/or open offer do not succeed, UBH will vote in favour of Diageo in respect of the remaining holding. The contingent contract has only temporary effect on voting rights. UBH will vote for Diageo for four years only, thereby giving short-term control to Diageo, SES said.
SES draws attention to another interesting fact. The 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 the potential effect of limiting Diageo to have only 19.3 per cent shares in USL, if Diageo elects not to subscribe under the PAA and UBH refuses to sell additional shares, says SES.
Therefore, if Sebi was to revise the offer price, the trigger for open offer might not happen at all. This is strange, as the trigger for an open offer is supposed to be irreversible.