Diageo works on USL balance sheet

Hires Accenture for financial re-engineering, including slashing of debt ratios; changes to be visible soon

Diageo, the global spirits major which is scripting a massive overhaul of the Vijay Mallya-owned United Spirits (USL), has hired global consulting major Accenture to restructure the latter’s balance sheet.

The London-headquartered Diageo, which during early July had acquired a 25.02 per cent strategic management control for Rs 5,100 crore, is understood to have already initiated a move to restructure half of USL’s Rs 7,000-crore debt.

Accenture appears to be working on cost rationalisation measures, aiming at stricter financial discipline. And, reviewing a slew of capital expenditures. “In addition to the major focus of refinancing the stressed balance sheet and deleveraging, Diageo is working on rationalising the key lever of working capital to sales equation, currently 46 per cent, to bring it down to 32 per cent over two years,” says a senior industry analyst.

USL is currently under a gearing (debt to equity ratio) of 1.6 and the intention is to bring it down to 0.5 in three years.

In addition, it appears Diageo is seriously looking at how USL’s near-three per cent holding in the UB Group’s beer company, United Breweries, can be monetised, through which as much as Rs 800 crore could be infused into the balance sheet.

Diageo is also awaiting a decision by Britain’s Office of Fair Trade on whether Diageo's strategic stake in USL would lead to a monopolistic situation, of hoarding scotch reserves in lieu of USL owning the entire stake in Scotland-based scotch major Whyte & Mackay. “If OFT decides against Diageo, then USL will have to either reduce its stake to at least 49 per cent or dispose off the asset,” say analysts. Diageo had earlier stated that Whyte & Mackay was not a key part of its emerging markets push.

“Diageo is closely combing all aspects of USL's operations and there will be a slew of changes which it will be implementing as early as from April 2014. The effects of these measures will be surely felt during the next fiscal,” say analysts. Prior to starting the financial re-engineering of USL’s balance sheet, Diageo had already made sweeping changes in the board of directors and management of USL. It had named four of its nominees to the board and appointed Anand Kripalu, a veteran in the fast-moving consumer goods segment, as managing director from May 2014.

Diageo might also look at distilling its brands at USL’s distilleries over a period of time, furthering cost efficiency in the operations.

DEAL DETAILS

• Diageo had acquired 25.02 per cent strategic management control for Rs 5,100 crore
• USL is currently under a gearing of 1.6 and wants to bring it down to 0.5
• Diageo has already initiated a move to restructure half of USL’s Rs 7,000-crore debt