The deal may also give Mallya a chance to revive the parent UB Group’s grounded Kingfisher Airlines Ltd.
On 9 November, Diageo, the world’s largest distiller by revenue, agreed to buy a majority stake in USL for a total consideration of Rs.11,166.5 crore, offering the Indian liquor tycoon a way out of mounting debt woes.
London-based Diageo, the maker of Johnnie Walker Scotch whisky and Smirnoff vodka, aims to acquire a 53.4% stake in USL, the producer of Royal Challenge and McDowell’s No. 1 whiskies and Romanov vodka, in a complex deal.
The transaction entails the direct purchase of a 27.4% stake in USL, including 19.3% promoters’ holding, for £660 million and the issue of fresh equity, followed by an open offer to buy 26% of the expanded equity from public shareholders at Rs.1,440 per share—the price paid for the direct purchase.
“Although it was expected that CCI would clear the deal, it’s a positive that they’ve given clearance without conditions. Some people were expecting CCI to ask the companies to change some terms of the agreement. Now the focus moves to the execution by Diageo. USL margins are very low and one of the key challenges for Diageo will be to improve their margins,” said V. Srinivasan, an analyst at Angel Broking Ltd. “At this price, I don’t think a lot of shareholders will tender their shares. But Diageo will settle for less than 50% control.”
India’s antitrust regulator said it approved the deal “by any of the modes as stated in the notice and other documents on record, under sub-section (1) of Section 31 of the Act, as the proposed combination is not likely to have an appreciable adverse effect on competition in India.”
The Competition Commission’s approval was the only remaining clearance for the high-profile deal.
The approval paves the way for Diageo to begin its open offer to buy 26% of United Spirits from public shareholders. However, with United Spirits trading at Rs.1,840 — comfortably over Diageo’s offer price of Rs.1,440 — analysts said few, if any, shareholders would sell their stock to the UK company.
“I don’t believe anyone will tender their shares at this price. There’s also the fact that investors have been waiting for this development for the past year. They have more to gain if they hold on to their shares because the outlook for United Spirits is bright after the Diageo takeover,” said Nikhil Vora, research head at IDFC Ltd.
Diageo is renowned for improving margins and business practices at companies it buys. The UK distiller is also expected to accelerate the process of ‘premiumisation’ at United Spirits, which still gets a majority of its volumes from low-margin liquor brands such as Bagpiper whiskey.
The anti-trust watchdog said as much in its approval.
“In the present case, Diageo’s acquisition of USL may give a boost to the premiumisation strategy. Thus, new premium brands of the established brands (brand proliferation) and new premium brands (brand extension), are likely to be introduced in the market for spirits,” the antitrust regulator posted on its website.
“The degree of product differentiation across price segments is likely to increase in the post combination scenario. The combination may increase and improve consumer choice and since the combining parties produce distant substitutes, the synergy of the firms will not detract competition,” it added.
Mallya is expected to use some of the money he gets from this deal to try and revive Kingfisher Airlines Ltd, also part of the United Breweries Group. Kingfisher Airlines has been grounded since 1 October, first because of staff protests against unpaid salaries and thereafter because of regulatory issues.
Though Mallya first said he will not divert funds generated through the Diageo-USL deal, his company later said the promoters may use part of funds to revive the airline.
In mid-February, lenders to Kingfisher Airlines said they had decided to recall all loans given to the airline, kicking off the process for the recovery of Rs.7,000 crore in debt.
“The banks explicitly support the transaction with Diageo and would work with us in finding an orderly method of disposal of some of the pledged shares to Diageo if appropriate,” Prakash Mirpuri, vice- president, corporate communications, UB Group, said a day after the lenders decided to recall the loans.