Diageo Plc (DGE), the world’s biggest distiller, gained control of United Spirits Ltd. (UNSP) after completing the final stage of a transaction to acquire a stake in the Indian maker of Bagpiper whiskey.
The London-based company bought a 14.98 percent stake from a firm owned by Vijay Mallya for 31.3 billion rupees ($521 million), Diageo said in a statement yesterday. That gives it a 25.02 percent holding at a total cost of 52.4 billion rupees, which combined with voting and other governance arrangements with Mallya is enough for control.
The stake in United Spirits will give the U.K. company the leading position in the world’s largest whiskey market. Distillers such as Diageo and Pernod Ricard SA (RI) are seeking to expand in emerging markets where booming economic growth is creating a burgeoning middle class with more disposable income. Diageo will seek to push Johnnie Walker whiskey in India.
“Diageo have what they wanted, which was effective management control,” said Martin Deboo, an analyst at Investec Plc. “It’s a little messy as they are still a minority shareholder. However, once the dust has settled on the terms, we expect the market to focus on the transformational impact: Diageo get to plant their flag in one of the biggest potential markets for western spirits alongside China.”
Diageo, which also sells Smirnoff vodka, Captain Morgan rum and Guinness stout, had held talks with Mallya on a deal before. Discussions collapsed after United Spirits deemed a previous offer too low in 2009.
“Through this acquisition we have transformed Diageo’s position in India,” Diageo Chief Executive Officer Ivan Menezes said in the statement. “We will now begin the work to identify and capture the significant growth opportunities within this attractive market.”
Diageo faced risks completing the purchase of Indian tycoon Mallya’s shares, which were offered, along with other assets, as collateral for his money-losing Kingfisher Airlines Ltd. (KAIR) It had sought to buy a further 2.4 percent in the deal, announced in November, though some of the shares were pledged as security for loans to companies owned by Mallya. If released from security interest, Diageo may buy them later, it said.
Diageo initially fell short of gaining a controlling stake in United Spirits after a mandatory open bid for shares at a price of 1,440 rupees a share drew little interest. The price was the same as accepted by Mallya, who has been seeking to cut Kingfisher’s debt after five years of losses.
Mallya will continue as chairman of United Spirits, with Ashok Capoor as CEO and P.A. Murali as chief financial officer. Mallya-controlled companies, which have voting rights over 11.1 percent of United Spirits’ shares, will vote with Diageo for four years or until Diageo gets a majority stake.
Diageo and Mallya may explore opportunities to extend their relationship into other emerging markets in Africa and Asia through a further joint venture, according to the statement.
The United Spirits deal will be funded by debt and cash resources and will add to Diageo’s earnings by its second year, the company said. It was at a multiple of 18 times United Spirits’ earnings before interest, taxation, depreciation and amortization for the year ended March 2013, Diageo said.
The deal was “done at a sensible entry multiple,” Deboo at Investec said. “The fact that United Spirits will be fully consolidated means that it should be materially accretive to the closely-watched metrics of organic sales and profit growth.”
JM Financial Ltd. (JM) and Bank of America Merrill Lynch advised Diageo on the deal. Ambit Corporate Finance acted on behalf of United Spirits.
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