For years, Diageo Plc (DGE) has sought to shore up its operations in India, where it accounts for a tiny fraction of whiskey sales. Now, a struggling airline may give the world’s biggest distiller the chance it needs to gain a stronger foothold in the world’s biggest whiskey market.
As Vijay Mallya’s Kingfisher Airlines Ltd. (KAIR) has been battered by high fuel costs and falling ticket prices, the Indian billionaire has expressed a willingness to sell part of his United Spirits Ltd. (UNSP) to Diageo.
A deal would help Diageo, based in London, bolster its position in a $21 billion whiskey market where a maze of regulations and taxes restrict foreign liquor producers. Diageo, the maker of Johnnie Walker Scotch, trails global rival Pernod Ricard (RI) SA in the country and has failed in past efforts to close a deal with Mallya.
Diageo has “never been able to secure a market in India as Pernod Ricard and United Spirits have,” said Sharan Lillaney, an analyst at Angel Broking in Mumbai. For the U.K. distiller, “this is the best move. You get a company that is among the largest in the world, excellent distribution network, excellent contacts everywhere.”
United Spirits rose 0.95 percent to close at 1,250.80 rupees today after gaining as much as 5.7 percent earlier in the day. Kingfisher Airlines dropped 4.9 percent to 14.60 rupees today.
Kingfisher Airlines will need a capital injection of $600 million in the next two months after defaulting on loan payments following five years of losses, industry consultant CAPA Centre for Aviation said in August. Mallya -- worth $1 billion as of March, Forbes reports -- owns about 36 percent of Kingfisher through his own holdings and affiliated companies, according to data compiled by Bloomberg.
’King of Good Times’
Kingfisher this week canceled all its flights through at least Oct. 4 after locking out striking workers it said were intimidating other employees.
The gregarious Mallya, who has called himself “The King of Good Times,” owns India’s biggest brewer, United Breweries Ltd. (UBBL), which sells Kingfisher beer. The 56-year-old tycoon also owns a 95-meter (311-foot) yacht called the Indian Empress, a stake in the country’s only Formula One racing team and a cricket squad named Royal Challengers Bangalore.
Diageo and United Spirits have courted each other before with no success, so a deal is far from certain. In 2009, the British company sought a minority stake in Bangalore-based United Spirits. Talks collapsed after the Indian distiller said the offer was too low.
Whyte & Mackay Sale?
Mallya could demand a high price again or choose to put United Spirits’s Whyte & Mackay Scotch whisky brand up for sale to raise money if the Diageo talks fail, analyst Lillaney said. United Spirits shares closed up 1.9 percent at 1,239.05 rupees on Oct. 1, giving the distiller a market value of 162 billion rupees.
Prakash Mirpuri, a spokesman for the UB Group, the Mallya conglomerate that controls United Spirits, declined to comment on the status of the Diageo talks.
Reaching an agreement with United Spirits would help Diageo in its goal of boosting sales in Asia from about 14 percent of revenue today to 20 percent by 2015, according to Gilbert Ghostine, Diageo’s president for the region.
“In India, you have 20 million consumers coming into legal drinking age every year,” Ghostine said in an interview in Singapore on Oct. 1. United is “the leading local player... It’s a very attractive business.”
Indian retail sales of whiskey grew 12 percent in 2011 to reach $21.1 billion, almost four times the U.K. and nearly triple France, according to researcher Euromonitor International. With foreign spirits facing a 150 percent import tax, Indians prefer domestic whiskeys such as the top-selling McDowell’s and No. 2 Bagpiper, both made by United Spirits.
Non-Indian brands make up just 1 percent of liquor sales, according to Kepler Capital Markets, a weakness due largely to the heavy taxes foreigners face. At a mom and pop store in New Delhi’s Vasant Vihar neighborhood, a 750-milliliter bottle of Johnnie Walker Black Label Blended sells for 3,430 rupees -- about 60 percent more than the typical price in the U.S. United’s Bagpiper Gold Premium, by contrast, costs 260 rupees and McDowell’s Signature runs 610 rupees.
Rohit Sharma, assistant manager for food and beverage at Le Meridien hotel in New Delhi, insists the price difference is warranted. Domestic whiskeys, made from local water and aged far less than genuine Scotch, simply don’t taste as good, he said in Nero, the hotel’s upscale bar. With local brands, he said, “the quality is not very high.”
Many Indians seem to be coming to the same conclusion. Diageo says its sales rose by 24 percent in India for the year ended in June.
A deal with United Spirits would give Diageo the distribution it needs to boost sales in India. The British company has less than 1 percent of the Indian spirits market, versus Pernod’s 9 percent and United Spirits’s 44 percent, UBS AG estimates.
United Spirits offers “a ready-made structure for Diageo, which is very hard to replicate,” said Ankur Bisen, an associate vice president with Technopak Advisors Pvt.
In Scotch, Diageo has about 20 percent of the Indian market, Nomura Holdings Inc. estimates, about what United has with Whyte & Mackay and Jura, Scottish brands the Indian company owns. Beam Inc. (BEAM) has 24 percent of the Scotch market with Teacher’s, and Pernod holds 21 percent with its Royal Stag, 100 Pipers and Ballantine’s brands.
Diageo sells Smirnoff vodka and Rowson’s Reserve, a domestic whiskey it introduced last year, and the company has been increasing investment in India and adding salesmen and distribution. In 2002, Diageo sold Gilbey’s Green Label, India’s No. 3 whiskey brand, to focus on its international spirits, the company said at the time.
Pernod’s stronger position comes from its purchase of Seagram Co. in 2001, which gave the Paris company a portfolio of domestic whiskeys such as Blenders Pride and Royal Stag. Pernod declined to comment on Diageo’s prospects in India, but said the country remains a priority.
United Spirits’ operating margins are 13 percent compared with Diageo’s 34 percent, Kepler Capital Markets estimates. A joint venture with Diageo that distributes higher priced Scotch could help boost United’s profitability.
With a deal, Diageo would have “better distribution than Pernod in India and be much bigger,” said Ian Shackleton, an analyst at Nomura in London. The two companies “can make two and two equal five in a way that others can’t.”