The not so good-times

India deal leaves Diageo with a long hangover

Diageo's foray into India has left it with a long hangover. The UK drinks group is fighting a legal battle to hang on to some of the United Spirits shares it bought from troubled Indian tycoon Vijay Mallya. Though it still has options to reach a majority shareholding in India's largest purveyor of booze, Diageo's gamble on the subcontinent is getting riskier.

Diageo's attempt to take control of the distiller of McDowell's and Signature whiskies has been fraught since it began in 2012. The UK giant set out to acquire up to 53.4 per cent of United Spirits in a three-part deal, but only reached half that level after a failed public tender offer. Now, a regional court has ruled that Diageo must unwind the purchase of a 6.98 per cent stake in United Spirits from Mallya's United Breweries. Creditors to the tycoon's grounded Kingfisher Airlines claimed that because the beer company had guaranteed some of their debt, it should not be allowed to sell the shares.

The ruling, which Diageo is appealing, threatens the considerable influence it wields over United Spirits. Despite its minority shareholding, the UK company has four representatives on the 12-member board and has overhauled the management team. Diageo's effective control rests on a shareholder agreement that requires Mallya and his companies to vote their remaining near-11 per cent shareholding in United Spirits in support of Diageo's decisions for up to four years.

If Diageo is forced to hand back the disputed shares, its stake will fall below 20 per cent. That could also call into question the validity of the shareholder agreement with Mallya. Meanwhile, Kingfisher's creditors could attempt to seize the tycoon's remaining shares in United Spirits. Diageo can still help itself.

It could top up its stake by buying in the open market or attempting a second tender offer. It also has some financial protection: its United Spirits investment, which cost a total of $1.05 billion, is worth almost $1.7 billion at current market prices. Whatever happens, however, Diageo's bid to break into one of the world's fastest growing spirits markets is likely to be a drawn-out headache.