Diageo bid for United Spirits' stake set to fail

USL's stock is 25% above the Rs 1,440 Diageo is paying in the offer that was triggered by its Nov deal to buy a separate 27% from Mallya

Diageo Plc tried for years to buy part of Vijay Mallya's United Spirits Ltd (USL) before striking a November agreement to take a 53 per cent stake in the company.

That bid for majority control will likely fail, leaving Diageo with less than a third of India's largest distiller.

London-based Diageo is likely to draw little investor interest in an open offer beginning today for 26 per cent of the Asian distiller. United Spirits' stock is 25 per cent above the Rs 1,440 Diageo is paying in the offer that was triggered by its November deal to buy a separate 27 per cent from Mallya and others.

"At the current juncture, it looks very difficult for Diageo, and I'd be surprised if someone actually sells," in the open market, Abhijeet Kundu, Mumbai-based analyst at Antique Stock Broking Ltd. "They will be under pressure to raise the price, though that appears unlikely."

Diageo is seeking to expand in the world's largest whisky market through the deal that could cost as much as $2.1 billion, as rising incomes boost demand for alcohol. A failed tender offer to get the majority will leave the maker of Johnnie Walker Scotch with the option to raise the price of its offer, buy out shares gradually over the coming years or suffer the headache of being a minority investor, analysts including Nomura International's Ian Shackleton said. Being a minority holder in the maker of Bagpiper and McDowell's whiskey is "less preferable for Diageo than getting a majority share and immediately being in the driving seat" said Shackleton. "They'll end up getting to where they want to get to, but it'll take a little bit longer than originally targeted." Diageo's offer ends on April 26.

Liquor baron
The open offer is the "starting process," and Diageo will raise their price or pursue other approaches to gain majority control of the spirits maker, said Ankur Bisen, vice president for retail at consultant Technopak Advisors Pvt. "It's clearly a work in progress."

Under the terms of the November deal, Diageo would get 19 per cent from Mallya and others. It would also be allotted preferential stock that would amount to 10 per cent of United Spirits enlarged share capital. Another 26 per cent would come from the open market if the tender offer was fully subscribed.

Without a majority holding, Diageo is "slightly reliant on Mallya's support and that's not quite as secure as having your own shares," said Shackleton. Mallya's UB Holdings has said it will retain a 15 per cent stake after the deal is completed.

If Diageo does complete its acquisition of shares from Mallya, it can nominate the chief executive officer and chief financial officer. If it doesn't get a majority interest, Mallya's holding company has agreed to vote its remaining shareholding as directed by the UK distiller for a four-year period.

The company believes that a shareholding in excess of 25.1 per cent would give it control, spokeswoman Rowan Pearman said yesterday. Prakash Mirpuri, a spokesman for the UB Group, the Mallya conglomerate that controls United Spirits, couldn't be reached.

Bank collateral
Diageo also faces risks in completing its purchase of Mallya's shares. The liquor baron offered United Spirits stock and other assets as collateral for his loss making Kingfisher Airlines Ltd. The airline has halted flights since October, after struggling with an Rs 8,600-crore debt pile.

An Indian court this month declined to stop banks from selling pledged shares of United Spirits Ltd. The banks haven't specified what portion of Mallya's United Spirits stake is pledged for Kingfisher loans.

Mallya's UB Holdings lost some of its stake in United Spirits and Kingfisher, after the banks sold some of their pledged shares on April 1, according to exchange filings today. UB's stake in the whiskey maker fell to 15.7 per cent from 17.8 per cent.

"There are too many questions right now," said Sachin Bobade, analyst at Brics Securities. "There is no clarity about how this deal will play out."

Distribution network
In 2009, the British company sought a minority stake in Bangalore-based United Spirits. Talks collapsed after the Indian distiller said the offer was too low.

United Spirits has a leading 43 per cent share of India's whiskey market, which Euromonitor International estimates will grow about 50 per cent to $31.1 billion in the five years through 2016.

Access to United Spirits' widespread distribution network would over time provide a boost to Diageo's international spirits brands and help it tap rising Indian demand for Scotch.
UNDER PRESSURE

• London-based Diageo is likely to draw little investor interest in an open offer beginning Wednesday for 26 per cent of the Asian distiller
• Diageo is seeking to expand in the world's largest whisky market through the deal that could cost as much as $2.1 billion, as rising incomes boost demand for alcohol
• A failed tender offer to get the majority will leave the maker of Johnnie Walker Scotch with the option to raise the price of its offer, buy out shares gradually over the coming years or suffer the headache of being a minority investor, analysts say