Takeover threat may see Mallya buying back UB stake

Armed with the right of first refusal, Chairman Vijay Mallya is set to ensure United Breweries stays within his empire amid reports that beer makers Anheuser-Busch Co and Heineken are vying for Scottish & Newcastle's (S&N) 37.5 per cent stake in his flagship company, analysts said today.

UK-based S&N is joint owner of United Breweries along with UB Holdings, each having 37.5 per cent stake.

S&N is currently negotiating a takeover bid by a consortium of Carlsberg Group and Heineken, and is reported to be in discussions to dispose off its worldwide interests.

Analysts said United Breweries may either offer to buy back stake from the Edinburgh-based company or may arrange for another investor to buy the stake on its behalf.

"Either way, I do not think Mallya will give up control of his flagship enterprise," said an analyst at a large domestic institution.

Mallya himself refuses to disclose his strategy, recently telling the media he was watching the turn of events "closely."

Mallya may have to initiate a buy-back of S&N's 37.5 per cent stake via any of his existing companies, to protect United Breweries from falling into foreign hands.

The Securities and Exchange Board of India's Substantial Acquisition of Shares and Takeovers Regulations 1997 stipulates that if a foreign entity, either directly or indirectly acquires 15 per cent or more stake in an Indian listed entity, it will have to make an open offer to acquire another 20 per cent from domestic shareholders.

"While the details of the agreement between S&N and United Breweries may have some provision addressing such an eventuality, the law clearly states that an open offer will have to be made," said N S Nappinai, a corporate lawyer who heads a Mumbai-based law firm.

In order to prevent an open offer from being triggered, Mallya will have to buy back the entire 37.5 per cent stake, or place it in part with other financial or strategic investors such that no single entity gets over 15 per cent.

Analysts are not bullish on the company's ability to raise adequate funds for the buyback.

Reports suggest Scottish & Newcastle's 37.5 per cent stake in United Breweries may be valued at about $1 billion (Rs 3,950 crore).

"United Breweries is already over-leveraged due to the recently concluded open offer for Deccan Aviation, the Whyte & Mackay acquisition, and the pending aircraft order book of Kingfisher Airlines," said an analyst at a foreign brokerage. United Breweries' debt-equity ratio is around 0.8-0.9:1.

"While the liquor business generates substantial cash flows, it may not be enough to buy the stake from S&N. It will not be easy for them to get a large loan given their current debt-equity ratio," the analyst said.

United Breweries alone has a capital expenditure plan of Rs 1,200 crore by 2012 to expand capacities and unclog existing capacities.

It is coming out with a rights issue of shares to raise up to Rs 425 crore to fund expansion plans. While the battle plays out on the global arena, the war is just beginning for United Breweries.

The company will have to take a decision on its next move fast or it may find itself facing the same fate that Essar-Hutchison, Corus, and many others faced"" an unwelcome takeover!

Today, United Breweries shares ended at Rs 311.10 on Bombay Stock Exchange, up 13.1 per cent from Tuesday.