USL trying to keep Whyte & Mackay in its fold

Market buzz is that the firm has started process to find a buyer for this asset with a valuation of as much as $1.5 bn

With just a couple of days left for the Office of Fair Trade (OFT) in London to announce a decision on whether United Spirits will be able to retain control over its scotch subsidiary Whyte & Mackay, there is market buzz United Spirits has started scouting for a buyer for the asset, valued at $1.5 billion. After Diageo, the London-headquartered spirits major, acquired 25.02 per cent strategic management stake in United Spirits, OFT has been studying the deal to ascertain whether the fact that Diageo indirectly controlled Whyte & Mackay would lead to monopoly in the market.

It is understood OFT will announce a decision on the matter on or before November 25. United Spirits has been providing various data sought by OFT. “The intention is to retain Whyte & Mackay. It is a valuable asset for us, and with the value of scotch growing in global markets, this asset is strategic in nature,” a senior UB Group official told Business Standard. He added the chances of retaining or exiting the asset were equal. Even if OFT decides to allow Diageo to control the asset, there is another chance United Spirits can reduce the stake over a period of time and hold on to this prime asset.

In 2007, United Spirits had acquired Whyte & Mackay in a highly leveraged deal for $1.2 billion. Since then, it has been slowly turning around the company to be more of a branded player, instead of a bulk supplier of scotch. The immense scotch reserves with Whyte & Mackay will play a key role as Diageo plans to push the premiumisation agenda across the globe. According to data from Scotch Whisky Association (SWA), the value of scotch exports increased 11 per cent to about £2 billion in the first six months of this year from £1.78 billion in the corresponding period last year. Between January and June this year, 563 million bottles of scotch were exported, a rise of nine per cent compared to the year-ago period.

“This snapshot of export performance in the first half of 2013 reflects the growing demand from a wide range of markets, against a slowdown during the corresponding period a year earlier. On an annualised basis, the value of exports rose six per cent to £4.5 billion from £4.2 billion in the 12 months ended June,” SWA said. A senior SWA executive said: “Demand for scotch whisky from mature and emerging markets around the world grew strongly in the first half of this year, after a slow start in 2012. While these figures provide a snapshot of what is happening with exports, the industry is confident this expansion will continue. The significant new investment in the industry in Scotland by scotch whisky producers reflects the belief growth will be sustainable.”

Diageo’s India strategy:
Even as Diageo and United Spirits await the OFT decision, Diageo has said it will not shy away from exiting mass-end brands in India that are not profitable, as it strives to aggressively move ahead with its premiumisation strategy to achieve “top-tier net sales growth and increase margins”. The spirits major is also evaluating the total portfolio strategy and investments behind brands and production at United Spirits. The company’s plan for India is in line with its strategy in emerging markets.

“Across all regions, we aim to accelerate mix improvement through premiumisation to offset initial margin dilution from growth of emerging middle-class brands,” Diageo said at its investment conference in London on Tuesday. The evaluation of United Spirits’ portfolio strategy, brand and production investment and premiumisation strategy was to ensure “long-term value creation,” said the maker of the Johnnie Walker brand. The company said India wasn’t immune to the slowdown being seen in emerging markets, and this had turned the focus on cost savings to offset inflation.

Diageo has emphasised its focus on tightening overhead costs, in line with its focus on margin improvements. The company’s overhead costs remained flat across developed economies, while these dropped below 15 per cent in emerging markets in financial year 2013 from about 17 per cent in the previous financial year.

According to analysts at Espirito Santo, Gilbert Ghostine, president (Asia-Pacific), Diageo, and member of the United Spirits board of directors, has said Diageo wouldn’t hesitate to exit low-end brands that didn’t make money. He said United Spirits had exited direct operations in Tamil Nadu, where it was facing volume pressure, adding the possibility of a spill-over of this situation to other states was low. Ghostine had said margins would continue to be under pressure and it would take a long time before an improvement was see, the brokerage added.