Diageo to spend Rs 11,448 cr for another 26% in USL

At Rs 3,030 a share, offers 20% premium to average 60-day stock price

The London-headquartered Diageo Plc on Tuesday offered to pay $1.9 billion (Rs 11,448 crore) for an additional 26 per cent stake in Bangalore-based United Spirits Ltd (USL). The open offer is expected to open on June 11 this year and close on June 24.

The move, the company's second attempt to extend its reach in the world's largest whisky market, is expected to further strengthen the yields for the global investors of Diageo, best known for its Johnnie Walker scotch whisky.

Diageo said it would pay Rs 3,030 for each USL share, a 20 per cent premium to volume-weighted average stock price in the past 60 days on Indian bourses. This is more than double the Rs 1,440 a share Diageo had offered in early 2013, after acquiring a strategic 25.02 per cent stake through preferential allotment from companies led by USL Chairman Vijay Mallya. At that time, the stock had rallied strongly to trade in the range of Rs 2,200-2,500 apiece, leading to a failed open offer.

HIGH STAKES

• Rs 11,448 cr: The amount Diageo will invest in buying an additional 26% stake in USL through open offer
• $660 mn: The money sale of Whyte & Mackay is expected to fetch
• 40%: USL's share in the Indian liquor market
• Rs 3,030: Diageo's open-offer price for each USL share
• 20%: Premium offered by Diageo to USL's 60-day volume-weighted average price
• 54.78%: Diageo's holding if the open offer is successful
• Rs 6,574 cr: Diageo's earlier payout for the 28.78% stake it holds in USL
• Rs 18,000 cr: Diageo's total payout if the open offer is successful - 38 times USL's Ebitda for year ended March 31, 2013

With a 28.78 per cent stake, for which it had shelled out Rs 6,600 crore, Diageo already has a strategic management control over USL, India's largest spirits player. Its second open offer, which aims to take the holding in the Indian company to 54.78 per cent, is estimated to cost Rs 11,448 crore. If the offer is successful, the London company's total investment in the United Spirits would reach Rs 18,000 crore, about 38 times USL's consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda) for the year ended March 31, 2013. Mallya, along with a slew of his companies, holds 9.83 per cent in USL.

Diageo's announcement of a second open offer was cheered by the Dalal Street on Tuesday and the USL stock surged 11.5 per cent over its previous close end the day at Rs 2,853.95 a share on the National Stock Exchange.

According to analysts, however, the offer might not get a wholehearted support from large institutional investors this time, too. "Diageo has made its intention clear that it wants its holding to go above 51 per cent. It has raised the bar from Rs 1,440 to Rs 3,030 a share. After getting a clear indication that Diageo wants to gain absolute control, investors might like to wait and watch," a senior industry analyst tracking United Spirits told Business Standard.

Diageo Plc Chief Financial Officer & Executive Director Deirdre Mahlan, however, told Business Standard that the company was hopeful of good subscription this time around, as the situation now was much different from that at the time of the first offer.

"There is a good premium we have arrived. We certainly feel the institutional investors will tender their shares," she said, stressing Diageo did not plan to delist USL.

Why is Diageo investing so much in India?

Diageo is giving an aggressive push to its emerging-market plans and India is a place it sees a lot of value in. India-born Chief Executive Ivan Menezes recently told investors India would be among top markets for his Diageo, which is aiming to derive about 10 per cent of its business from the country.

Compared with most countries' three per cent or less yield to Diageo's worldwide sales, India's contribution might climb to 10 per cent over the next few years.

"North America is the powerhouse. Business there delivers about a third of our net sales and about 40 per cent of our operating profit," he had said.

When Diageo starts consolidating USL numbers into its global profit-and-loss, likely from June this year, its global investors would start getting to feel the benefit of such a move. USL had a revenue of Rs 10,000 crore and a net profit of around Rs 300 crore last financial year.

According to Diageo, its sales in India grew 35 per cent during the October 2013-March 2014 period, against a 1.3 per cent growth in all emerging markets put together. The company attributed the spectacular India growth to gains as USL began selling the London based-distiller's brands through 65,000 outlets.

"The biggest transformation is in India and our investment in USL," Menezes told investors recently. "The strength of United Spirits' route to market is offering a benchmark to many other markets where we are present."

According to him, Diageo is trying to replicate in other markets the combination of scale and agility in USL operations. "It is my ambition that in all our markets we have the capability like USL's - to launch an innovation into 95 per cent of outlets in five days," he explained.

USL's distribution network - of reaching across 90 per cent of the country - was keenly sought by Diageo, which initially sought to buy 53.4 per cent of the company but settled for 25.02 per cent after hitting legal hurdles last July. Diageo started selling its liquor through USL outlets since October 2013. "We have our sales promotion agreement in place and that contributed to a very strong growth we delivered in the first half in India," Menezes added.

Legal issues
Diageo is moving ahead with this transaction despite a slew of legal battles, in which UB Holdings, United Spirits' parent company, is involved.

Due to UB Holdings' high exposure to Kingfisher Airlines (UB Group's defunct airline), the creditors to the airline had earlier got an annulment order from the Karnataka High Court on UB Holdings' sale of a 6.98 per cent stake to Diageo. However, both UBHL and Diageo have moved the Supreme Court against this annulment and the hearing is expected this month.

"We maintain that the transaction to acquire 25.03 per cent by early July 2013 is perfectly legitimate. I will not be able to comment further as the matter is in the Supreme Court," Deirdre Mahlan said.