Diageo revives talks for stake in India's dominant spirits maker

BANGALORE/LONDON Tue Sep 25, 2012 5:57am EDT

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BANGALORE/LONDON (Reuters) - Diageo Plc (DGE.L) is in talks to acquire a stake in Indian billionaire Vijay Mallya's United Spirits Ltd (UNSP.NS), reviving an on-again, off-again courtship that would ramp up its presence in the world's largest whisky market.

Mallya has been scrambling for nearly a year to raise funds for his ailing Kingfisher Airlines Ltd (KING.NS), prompting market speculation that he may need to offload stakes in United Spirits, India's dominant spirits maker, or United Breweries Ltd (UBBW.NS), producer of his flagship Kingfisher beer.

Diageo, the world's biggest spirits group, has long coveted an expanded presence in India. In 2008, the two sides held talks that collapsed, but sources close to the situation said Diageo is hopeful of a deal this time as Mallya is more open to offers.

The maker of Johnnie Walker whisky and Smirnoff vodka is looking initially to buy a 15 percent stake from Mallya's UB Group, which owns about 28 percent of United Spirits, and a further 10 percent from other shareholders, one banker familiar with the matter told Reuters on Tuesday.

That would dislodge Mallya as the largest shareholder in United Spirits.

"There is no certainty that these discussions will lead to a transaction," United Spirits, the world's No.1 spirits maker by volume, said in a statement to India's stock exchanges.

Mallya declined to elaborate to reporters following United Spirits' annual shareholders meeting on Tuesday in Bangalore.

If Diageo took control of United Spirits it would need to unload the Indian company's Whyte & Mackay scotch whisky business to avoid anti-trust problems. Diageo is the world's biggest scotch whisky maker with around a third of the market.

Analysts see a deal as positive for Diageo as India is the world's largest whisky market and Diageo is the world's No.1 Scotch whisky maker.

"Emerging market sales would jump to 45 percent of Diageo sales from 40 percent now, and Diageo would gain a sizeable footing in what one day should be the world's largest Scotch market," said analyst Pablo Zuanic at brokers Liberum Capital.

MINORITY FOR MALLYA?

Mallya, whose high-profile struggle to keep Kingfisher aloft has dented his image as the self-described "King of Good Times," would retain a minority stake after the deal, sources have said, declining to be identified because the talks were confidential.

If Diageo acquired 25 percent of United Spirits, it would have to launch a mandatory open offer for at least 26 percent more of the company to bring its stake to 51 percent.

"They have been holding talks since 2008, but this time the expectations are high that the deal will go through because Mallya is in a really tight spot," said V. Srinivasan, analyst with Mumbai-based Angel Broking Ltd.

United Spirits had total gross debt of 81.4 billion rupees ($1.52 billion) at the end of March.

"The talks had earlier been called off due to differences over valuations and even now there are differences over valuation. What we know is that Diageo is offering 1,300 rupees per share whereas Mallya is looking for about 1,600 rupees per share," Srinivasan said.

Diageo may offer 1,200 rupees to 1,300 rupees a share, valuing the 25 percent stake at up to roughly $793 million, sources have said.

Diageo is seeking deals where it sees a path to control. Mallya has long been unwilling to cede control, a stance that could derail the current talks, people familiar with the matter said.

Shares in United Spirits rose as much as 8.4 percent on Tuesday to their highest level since May 2011.

They have more than doubled in 2012, with much of those gains coming in the past four months amid persistent market talk about a possible deal with Diageo.

The market value of United Spirits was roughly $2.7 billion.

SAVING KINGFISHER?

Kingfisher, which was until last year India's No.2 airline by domestic market share but is now the smallest among the six main airlines after grounding most of its fleet, has about $1.4 billion of debt.

While Kingfisher's lenders have been putting pressure on Mallya to bring in capital, one analyst said he did not think any sale proceeds from a deal for a stake in United Spirits would be injected into Kingfisher.

"This has nothing to do with Kingfisher Airlines," said Sharan Lillaney, an analyst at Angel Broking who tracks both United Spirits and Kingfisher Airlines.

"This is solely for United Spirits. Why would he put good money after bad money? They are doing a stake sale basically to get United Spirits out of a high-debt position that it is currently in," he said.

Earlier this month, India changed its rules to allow foreign airlines to own up to 49 percent in Indian carriers, a move long sought by Kingfisher, although no airline has publicly expressed an interest in taking a stake in it.

Shares in Kingfisher, which has never turned a profit, were up 1.5 percent on Tuesday and up 35 percent since the day before India announced the policy change. But they are still nearly 96 percent off their all-time high.

Mallya's other big company is United Breweries, the dominant beer maker in India. Mallya and Dutch giant Heineken (HEIN.AS) each own 37.5 percent of United Breweries, and sources said in March that Mallya was considering selling part of his stake to Heineken, although no deal transpired.

Heineken, like other beverage makers including Diageo, is keen to bolster its presence in fast-growing emerging markets to offset sluggish growth in mature markets and is close to a deal for full control of Singapore-listed Asia Pacific Breweries Ltd APBB.SI, the maker of Tiger beer. ($1 = 53.51 Indian rupees)

(Additional reporting by Sumeet Chatterjee, Indulal P.M. and Swati Pandey in MUMBAI, Anurag Kotoky in NEW DELHI and Jane Barrett in LONDON; Writing by Tony Munroe; Editing by Ryan Woo)

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