Takeover code tweak to aid Diageo-USL deal

The question now is, legal experts say, whether the new norms would come into effect prospectively or retrospectively

The Securities and Exchange Board of India (Sebi)’s move to tweak the takeover code on Friday may pave the way for UK-based Diageo’s $2.1-billion buyout of United Spirits Ltd (USL).

The capital market regulator said an open offer would be triggered from the date of the deal announcement, and that a preferential allotment of shares would be done based on the date when the board took the decision.

The guidelines in force were creating a confusion on when the open offer would be triggered as the offer was to be triggered after a 25 per cent stake is bought. This was a stumbling block in the pricing of the open offer.

In the Diageo-USL deal, Diageo announced an open offer even before it was triggered. Shares of USL went up sharply after the deal was announced in November 2012. The open offer would have cost the acquirer more had it been triggered later.

Diageo made an open offer at the same price, Rs 1,440, at which it acquired the promoter stake. The deal gave Diageo the first right of refusal to withdraw from the open offer if the price was revised by Sebi.

Diageo agreed to pick up a majority stake in USL through a multi-structured deal.

In a joint statement, Diageo said it entered into an agreement with United Breweries Holdings Ltd (UBHL) and USL to acquire a 27.4 per cent stake in the latter at Rs 1,440 a share.

Diageo was to acquire a 19.3 per cent stake in USL from UBHL. Further transaction was based on contingent agreements, which were structured in a way that if one agreement fails to achieve the desired result, another was to be activated.

The purchase of 19.3 per cent stake by Diageo in USL was not enough to trigger an open offer. The deal announcement said the acquirer would seek further approval from USL shareholders for a new preferential allotment at Rs 1,440 a share, amounting to 10 per cent of the post-issue enlarged share capital of USL.

It was a preferential announcement that could have triggered an open offer. USL shareholders approved issuance of fresh equity to Diageo in December, which triggered the open offer against the one announced earlier. The share price of USL rallied nearly 50 per cent from the Diageo acquisition price of Rs 1,440 to touch a high of Rs 2,149 on November 29.

Sebi on Friday said, “Where the open offer obligations are triggered pursuant to an agreement or otherwise in combination of any modes of acquisition, the relevant date for making public announcement and determination of offer price shall be the earliest date on which obligations are triggered. This will, however, not be applicable if the subsequent trigger is on account of willful and deliberate act on the part of the acquirer.”

Legal experts said the question now is whether the new norms would come into effect prospectively or retrospectively.