Diageo seals deal with Mallya to pick up 53.4%

First move will be to acquire 27.4% in USL will launch open offer for 26%

Diageo plc, United Breweries (Holdings) Limited and United Spirits Limited have today announced agreements under which Diageo would acquire a 27.4% stake in USL, the leading spirits company in India. The consideration will be Rs 1,440 per share and the total consideration would be Rs 5,725 crore (approximately £660 million). Following completion of these agreements, Vijay Mallya will continue in his current role as Chairman of USL, and UBHL and Mallya will work with Diageo to build the USL business as the current consumer trends for premiumisation accelerate in India. The agreements are in two parts:

- An agreement to acquire a 19.3% interest in the current share capital of USL at a price of Rs 1440 per share from the UBHL group, the USL Benefit Trust, Palmer Investment Group Limited and UB Sports Management (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees).  Following this disposal, the UBHL group would continue to have a shareholding in USL amounting to 14.9 % of current share capital.

 

How Diageo will take control of United Spirits
Form of purchase	Current share capital	Enlarged share capital	Consideration (Rs cr)
Direct acquisition from UBHL	12.80%	11.50%	2,407
Direct acquisition from certain USL subsidiaries & group trusts	6.50%	5.90%	1,225
Preferential allotment		10%	2,094
Tender offer (maximum)		26%	5,439
Total		53.40%	11,165

- The shareholders of USL will be asked to approve the preferential allotment to Diageo at a price of Rs 1,440 per share of new shares amounting to 10% of the post-issue enlarged share capital of USL.

These agreements trigger an obligation on Diageo to launch a Mandatory Tender Offer to the public shareholders of USL. Diageo has therefore also announced that it will launch a tender offer to acquire, at a price of Rs 1,440 per share, a maximum of 37,785,214 shares, which equates to 26% of the enlarged share capital of USL.

On completion of the share purchases as described above and in the event that the tender offer were fully subscribed, Diageo will hold 53.4% of the enlarged USL share capital at an aggregate cost of Rs 11,166 crore (approximately £1,285 million). This represents a 20x multiple of USL’s EBITDA for the year ended 31 March 2012 and the transaction would be eps accretive in year 2 and economic profit positive in year 6 assuming a 12 % WACC.

Diageo and Mallya have entered into a memorandum of understanding under which they will form a 50:50 joint venture which will own United National Breweries’ traditional sorghum beer business in South Africa. Diageo’s investment for its 50% interest in the joint venture is expected to be approximately $36 million (approximately £25 million), subject to adjustment. Diageo and Mallya are also considering the possibility of extending this joint venture in order to maximise opportunities which exist in certain emerging markets in Africa and Asia (excluding India).

Paul S Walsh, Chief Executive of Diageo, said:

‘I am delighted at the opportunity Diageo has to be part of India’s large and growing local spirits market. As a result of the agreements we are announcing today we will be well positioned to take the growth opportunities presented by a spirits market where growth is driven by the increasing number of middle class consumers. USL’s number 1 position in local spirits together with our growing international spirits business of leading brands will enable us to grow across the consumer space as India’s increasing number of middle class consumers look to enjoy premium and prestige local spirits brands as income levels rise.

The combination of USL’s strong business with the capabilities which Diageo brings as the world’s leading premium drinks company will ensure that USL continues to lead the industry in India. Vijay Mallya’s experience in building USL to the leadership position it has is unique in our industry and in his position, as Chairman of USL, I look forward to working with him to deliver value for the shareholders of both USL and Diageo.  The acquisition of our shareholding in USL is fully aligned with our strategy to build our presence in the world’s faster growing markets and enhances our position as the world’s leading premium drinks company.’

Vijay Mallya, Chairman of the UB Group, said; 'I am very proud of USL and what has been created over the last 30 years to bring this company to its pre-eminent position in India. I have had a long association with Diageo and therefore I am confident that this winning partnership with Diageo provides USL with the best possible platform for future growth. I am delighted to remain part of that journey as Chairman of USL as we work together to build continued value for the shareholders of USL and UBHL.'