Diageo starts to pick up shares of USL from open market

The shares were acquired at Rs 2,400 apiece by Relay BV, a wholly-owned subsidiary of Diageo

This moves comes amidst speculation that Diageo may launch a second open offer for United Spirits.

In an attempt to tighten its grip over United Spirits, Diageo has paid a good Rs 472 crore to pick up close to an additional two million shares in the companyin a bulk deal on Tuesday, at a 70 per cent premium to the price at which it bought a 25.02 per cent controlling stake in the company in July, this year.

On Tuesday, Diageo - the world’s largest distiller - bought an additional 1,967,940 shares at a purchase price of Rs 2,400 apiece, presenting a steep premium to the Rs 1,440 a share it paid for about 36 million shares it acquired in July. The purchase, made through its wholly owned subsidiary Relay BV, gave Diageo a controlling stake in Vijay Mallya-led UB Group’s crown jewel and access to a market that pans across 65,000 points of sale, with 98 per cent distribution.

Morgan Stanley Asia (Singapore) PTE sold close to four million shares in the company for Rs 2406.51 apiece. Shares of USL closed at Rs 2581.05, down 1.52 per cent Tuesday on BSE.

DEAL DETAILS

• November 2012- Diageo says it will buy a 53.4% stake in USL
• 27.4%  of this stake would be directly from UB Group for Rs 1,440 a share
• Open offer for shares launched at Rs 1,440 a share, does not generate much excitement
• July 2013 - Banks refuse to part with 2.38% encumbered shares
• Diageo settles for 25.02% stake at Rs 1,440 a share
• November 2013 - Diageo buys additional 1.4 % stake in USL at for Rs 2,400/share

This move by Diageo through the creeping acquisition route comes as a surprise at a time when the stock price of United Spirits is trading at  a high premium and when Diageo - USL is in the midst of a legal wrangle with lenders to UB Group to acquire an additional 2.38 per cent stake, which is under the control of the lenders.  

As part of the initial transaction with USL which was announced during November last year, Diageo had outlined a roadmap to acquire 53 per cent stake in USL for Rs 11,000 crore. However, Diageo was unable to achieve its  target with its open offer to acquire 26 per cent of USL shares at Rs 1,440 per share was not welcomed by investors. As a result, Diageo only acquired about 60,000 shares for close to Rs  nine crore.

Diageo has repeatedly said India remains crucial to its growth in emerging markets it looks to to boost its overall topline, adding the company had factored in the cost pressures and slowdown in the market. “This transaction has not only transformed Diageo’s position in India; it will also transform Diageo. India is one of the biggest growth opportunities in our industry. United Spirits’ distribution reach is an enviable strength, as the number of middle-class consumers looking for premium and prestige local spirits brands increases as income levels rise,” Chief Executive Ivan Menezes said in the company's investor conference at London last week.

Diageo has exhibited a persistent tendency to pick up a majority stake in its acquisition targets, especialling in emerging markets. In its bid to acquire a majority holding in Sichuan Chengdu Quanxing Group in China, the company steadily bought shares over a series of transactions in 6 years to gain a 93 per cent stake from its initial holding of 43 per cent.