* Diageo offers to buy up to 26 pct more of United Spirits
* Tender offer at a premium of 18.5 pct to Friday's close
* Multiple of 38 times United Spirits' EBITDA tops historic
(Adds details on value, analyst comments, background,
By Sumeet Chatterjee, Nandita Bose and Martinne Geller
MUMBAI/LONDON, April 15 Diageo, the
world's biggest spirits maker, has launched a $1.9 billion bid
to nearly double its stake in United Spirits Ltd,
offering a rich price in the hope that India's increasingly
wealthy consumers will drink more alcohol.
If successful, Diageo would end up with 54.8 percent of
India's largest spirits company, which was previously controlled
by tycoon Vijay Mallya. He has shed assets under heavy debt and
the collapse of his Kingfisher Airlines Ltd, but
remains chairman of United Spirits.
The spirits market in India was worth 11.9 billion euros
($16.4 billion) in 2012, according to research firm IWSR, and is
being driven by growth of premium and super-premium brands.
"Diageo is doing the right thing, given the very significant
long-term upside for the Indian spirits market and the
opportunity, we believe, to significantly raise (United
Spirits') margins over time," said Citigroup analysts.
The maker of Johnnie Walker Scotch and Smirnoff vodka, which
already has 28.8 percent of United Spirits and management
control, on Tuesday offered to buy shares at 3,030 rupees
($50.30), a premium of 18.5 percent to their last closing price,
sending the stock up nearly 12 percent.
If fully subscribed, Diageo's offer would represent a
multiple of 38 times United Spirits' EBITDA (earnings before
interest, taxes, depreciation and amortisation) for the year
ended March 2013, which is much higher than even the industry's
most expensive deals.
Japan's Suntory agreed in January to pay over 20
times earnings for Beam Inc, which was close to the
record 20.8 times that Pernod Ricard paid in 2008 for the maker
of Absolut vodka. Analysts said earlier this month that Remy
Cointreau could fetch up to 22 times earnings, due to
its high-end portfolio of cognac.
"When you see a multiple like that, you draw your breath a
little," said Trevor Stirling, an analyst at Bernstein Research.
"But I'm inclined to give Diageo the benefit of the doubt," he
said, since Diageo is not known to be profligate when it comes
Indeed Diageo walked away from distributing Jose Cuervo
tequila last year after failing to reach a deal for an equity
stake with the brand's Mexican owners.
BETTING ON INDIA
India is a key battleground for global consumer goods firms,
including spirits makers, who are increasingly looking to
emerging markets to offset sluggish growth in Europe and North
Diageo generates about 42 percent of its revenue from
emerging markets but aims to lift that figure. Aside from United
Spirits, it has acquired businesses in Brazil, Turkey, China and
Guatemala and last month reshaped its management team to give
more focus on India and China.
Diageo said the investment in United Sprits would lift its
earnings on a per-share basis in the year ending June 30, 2016.
Two-thirds of Indians do not drink alcohol at all, often for
religious or cultural reasons, but rapid urbanisation, a young
population and a fast-growing middle class are changing
Despite an Indian economy growing at its slowest in a
decade, global companies have continued to invest in the
long-term potential of consumer spending in the country. Last
week, UK telecoms giant Vodafone Group Plc bought the
remaining 11 percent in its Indian unit and Unilever
increased its stake last year in its venture Hindustan Unilever
Last year, Diageo bought its existing stake in United
Spirits, settling with considerably less than it had sought
after a 2012 tender offer failed when it opted not to lift its
offer price despite a surge in United Sprits shares.
"We do think that it will be a successful transaction,"
Deirdre Mahlan, chief financial officer of Diageo, told Reuters
on Tuesday about the latest bid. "We believe that it creates a
unique opportunity for investors to be able to monetise their
Diageo controls United Spirits through its holding and a
shareholder agreement, and the tender offer is unlikely to
result in any management changes, Mahlan said.
Diageo intends to keep United Spirits listed in India even
if its offer is successful. The new offer will be launched in
June, it said.
Mallya's UB Group owned 10.46 percent of United Spirits at
the end of December. A spokesman for the group declined to
JM Financial Ltd and HSBC Holdings are
arranging the Diageo offer.
($1 = 0.7238 Euros)
(Editing by Tony Munroe, Stephen Coates and Keiron Henderson)