Want global shareholders to benefit from USL: Deirdre Mahlan

Interview with Chief Financial Officer and Executive Director, Diageo Plc

From the day in November 2012 when Diageo announced its deal to buy a 53 per cent stake in Vijay Mallya's United Spirits it has hit the ground running. Immediately after the first transaction in July 2013, when Diageo bought a 25.03 per cent stake, it appointed consumer goods veteran Anand Kripalu as CEO to take over from May 2014. Diageo then began selling its brands through the United Spirits network, bought stock in the open market to increase its holding to 28.78 per cent, and imposed global compliance standards. On Tuesday, Diageo announced its intention to buy an additional 26 per cent of the United Spirits stock through a second open offer. Deirdre Mahlan, chief financial officer and executive director, Diageo Plc, told Raghuvir Badrinath why she thinks the offer will succeed. Edited excerpts:

You are trying once again to gain absolute control of United Spirits. What is the rationale for this additional Rs 11,500 crore bet?

We have always maintained that we want control over companies we acquire. This transaction means we get certainty of control over the long term. Since July 2013, we have spent enormous management time over United Spirits. We are looking to increase our holdings in United Spirits so that the shareholders of Diageo get to participate in the benefits of what we are investing in globally.

Your last open offer failed. What are your hopes from this one?

We are confident with the offer we have made now. During our first open offer in late 2012 and early 2013, the United Spirits stock rebased on the market's perception of the benefits of Diageo's management and control of the business. That is now embedded in the shares. Second, there were assumptions on how the United Spirits' debt and Whyte & Mackay's monetisation would be handled. These aspects, too, have been factored in now. On top, all consumer goods stocks in the Indian markets have been re-rated and United Spirits is trading in that range.  We see the offer of Rs 3,030 per share as an attractive one.

Market players feel that you are gunning for complete control over United Spirits. They may bide their time yet again.

We have been looking for opportunities for a while. During November 2013 and January 2014, we acquired a little over 3 per cent from the market. And now we saw this opportunity and decided to go ahead. The large institutional investors should see this as an unique opportunity to monetise their holdings. We think it is a win-win situation: it gives us an opportunity to consolidate and them to monetise. That said, we do not intend to delist. Investors may want to monetise later and there will be opportunity for them to participate in the (United Spirits) story again.

If this offer sails through, Diageo will have committed over $3 billion in India. How do you intend to leverage this?

We expect to be EP positive in 2021-22, the seventh full financial year after completion (assuming a 12 per cent weighted average cost of capital) and EPS accretive in the year ending June 30, 2016.

At a broader aspect, India is a pretty attractive market for us. Consumers are premiumising across categories, including in Indian and imported spirits. The population size and the growing per capita income are encouraging. Across emerging markets, we have leveraged brands and their networks to push Diageo's portfolio. With our sales agreement with United Spirits, growth is in the high double digits.

There is a legal battle on in the Supreme Court over your rights on a chunk of United Spirits shares...

The issue of rights to a 6.98 per cent stake in United Spirits is in the Supreme Court and I cannot comment beyond stating that we have the title for those shares and we feel we acquired them through a bona fide transaction. We hope we will prevail in this. There is the aspect of another 2.38 per cent stake we will have to get from creditors of the UB Group and we intend to pursue that as well.

The sale of United Spirits Scottish subsidiary Whyte & Mackay is in the final lap. How will it pan out?

The board of United Spirits is handling that transaction and whatever resources come from that sale will be in United Spirits.