Diageo sets the ball rolling to restructure finances of United Spirits

Kicks off process of refinance as much as 50% of debt

Diageo, the global spirits major which recently has picked up strategic management control of Vijay Mallya's United Spirits, is rolling up its sleeves and is kicking off a comprehensive move to restructure the leveraged balance sheet of United Spirits.

United Spirits is under a debt of close to Rs 7,000 crore with a gearing of  1.5 times and Diageo is understood to be looking at refinancing as much as close to Rs 3,500 crore of that. Investment bankers tracking United Spirits said that Diageo has initiated discussions with a clutch of bankers to refinance the balance sheet. Diageo on its part said it will not be able to comment on this move.

The issue of debt overhang has been plaguing United Spirits for the past nearly two years and despite trying various instruments to refinance and reduce the debt, it was being unweildy for United Spirits.  The company had primarily got into the vicious cycle of debt when it went and acquired Scotland-based scotch whisky major Whyte & Mackay for as much as $1.2 billion in a highly leveraged transaction during 2007.

UB Group's recent move to go in for a strategic sale of 25.02 per cent to Diageo, has infused as much as Rs 2,800 crore into the balance sheet of United Spirits and around Rs 1,600 crore has already been used to pare debt from the earlier levels of Rs 8,200 crore, which pegged the leverage at 1.67 times by end of March 2013.  United Spirits short-term liabilities is amounting to close to Rs 2,500 crore in addition to the Rs 3,500 crore debt which is on its overseas subsidiary Whyte & Mackay. The company paid out a total interest of around Rs 990 crore during last fiscal on an operating profit of Rs 1,500 crore. During the first quarter of Fy14, the interest outflow was at Rs 228 crore on EBIDTA of Rs 391 crore.

This move by Diageo to restructure the balanace sheet comes close after it initiated an overhaul of the senior management of United Spirits including bringing in an FMCG veteran Anand Kripalu to lead the company from May next year.  Diageo has also revamped the Board of United Spirits and expanded to a 12-member Board while and retaining four from the earlier USL Board.

Even as Diageo has activated a move to restructure the balance sheet of USL, it is also awaiting a decision by UK's Office of Fair Trade which is probing the issue of whether Diageo gaining strategic control of Whyte & Mackay will lead to monopolistic situation. A decision is expected by end of November 2013 and if OFT decides against Diageo holding W&M, USL may be forced to either totally divest this asset or reduce its holding to atleast 49 per cent, which will also result in substantial inflow of cash into USL balance sheet.