Dalmore could pep up sale of whisky firm Whyte & Mackay

LONDON Fri Dec 13, 2013 10:16am EST

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LONDON (Reuters) - India's United Spirits (UNSP.NS) could attract more buyers for its Whyte & Mackay Scotch whisky business and tip the price over the expected 450 million pounds ($735 million) if it included the single malt Dalmore, sources familiar with the matter say.

A sale of most of Whyte & Mackay was offered last month by Diageo (DGE.L) to appease UK regulators concerned its purchase of a controlling stake in Whyte & Mackay's owner, United Spirits, would hurt competition in the world's No. 3 Scotch market behind France and the United States.

Whyte & Mackay has about 7 percent of Britain's market for blended Scotch whisky, which combines whiskies often made from various grains. It also supplies retailers for own-brand whiskies that account for 18 percent of a market worth $1.74 billion a year, according to researchers IWSR.

Diageo, which already controls more than 20 percent of the blended market, has offered to sell the large grain distillery at Invergordon, which accounts for the bulk of the blended Scotch Whyte & Mackay sells, as well as the smaller malt distilleries Fetercairn and Jura.

Diageo wants to keep the remaining small malt distilleries, Tamnavulin and Dalmore, which it says supply United Spirits and international markets. Sources say high-end Dalmore, known for its stag's head logo, is the jewel in the crown.

"I think if Dalmore's in, there's a very long list of buyers," said one source, referring to private equity firms, often attracted to consumer brands' cash flows, and rivals such as Pernod Ricard (PERP.PA), Remy Cointreau (RCOP.PA) and Campari (CPRI.MI). "If Dalmore's out, it's a bit narrower."

Without Dalmore, which used to hold the record for highest price paid for a rare bottle, sources say Whyte & Mackay might still appeal to Beam Inc BEAM.N or Bacardi, as a source of supply for the Teacher's or Dewar's brands, respectively.

"If you have a view that demand for whisky in 20 years time will be much higher than people have forecast ... bulk can be interesting," the source added.

Still, some suitors are hesitant about the potential of lower-priced whiskies given the worldwide trend of consumers choosing more premium tipples. The owners of the relatively cheap Loch Lomond Scotch have been looking for a buyer for some time, said two sources familiar with the matter.

Loch Lomond and Whyte & Mackay were not available to comment. Diageo referred to its previous statement that it was working with UK regulator, the Office of Fair Trading (OFT).

SOBER MULTIPLE

When it comes to trophy assets, deal multiples can be dizzying. Pernod Ricard paid 21 times earnings before interest, tax, depreciation and amortization (EBITDA) for the maker of Absolut vodka in 2008. But Bernstein Research analyst Trevor Stirling said that was unlikely here.

"Because most of Whyte & Mackay's business is still supplying product for other people's brands, we would expect a multiple much closer to the 10.4 times (EBITDA) which Pernod Ricard paid for Allied Domecq" in 2005, Stirling said.

Based on Whyte & Mackay's 2013 EBITDA of 45 million pounds, he expects a deal value in the area of 450 million pounds.

One source said that if Dalmore were included, any buyer would likely pay a higher multiple, but declined to be more specific due to not having seen the financials. A multiple of 15 would yield a price of 675 million pounds ($1.1 billion).

Any buyer must be approved by the OFT.

Two sources said large private equity firms could use it as a platform to buy more spirits brands, but that on its own, Whyte & Mackay's size was more suited for mid-sized firms.

Players with a taste for booze include TPG, which sold Diageo a Turkish raki maker in 2011; CVC Capital, which sold brewer Starbev to Molson Coors (TAP.N) in 2012; and Lion Capital, which sold Russian Alcohol Group to Central European Distribution Corp in 2009.

There is also KKR (KKR.N), which bought South Korea's Oriental Brewery in 2009 and Oaktree Capital (OAK.N), which took Stock Spirits (STCK.L) public in October but remains its top owner. Sources also say investors from emerging markets such as China and Russia may take a look but note that a formal process has not yet started so no parties are looking officially.

Scotch, which must be made in Scotland and aged for at least three years, is the world's most popular whisky, with nearly $30 billion a year in sales, according to IWSR. About 13 percent is malt whisky made from malted barley toasted over peat fire for a smoky taste. Leading "single malts" are Glenfiddich and The Glenlivet. But most of the market is blended Scotch.

One party already thirsting for a deal is Whyte & Mackay's former CEO Vivian Imerman, once dubbed "the Man from Del Monte" for his role in turning around the U.S. fruit company.

Imerman's investment firm Vasari said last month it would be keen to buy back the Whyte & Mackay assets, which Imerman sold to Vijay Mallya's United Spirits in 2007 for 595 million pounds, or about 18 times EBITDA at the time, according to Bernstein.

United Spirits will run the sale process and is currently interviewing banks to advise on it, said the sources, speculating that a formal process will kick off in January.

(Editing by Mark Potter)

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