Diageo Buys United Spirits Stake to Control Indian Distiller

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 today in a statement. That gives it a holding of 25.02 percent, 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 whisky in India.

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.”

Shares Gain

Diageo rose 3.7 percent to 1,967.5 pence at the close of trading in London. United Spirits shares gained 1.7 percent to 2,557.45 rupees in Indian trading, which ended before the announcement was made.

Diageo had 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 had initially fallen 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 Airline’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.

Earnings Boost

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 today.

JM Financial Ltd. (JM) and Bank of America Merrill Lynch advised Diageo on the deal. Ambit Corporate Finance acted on behalf of United Spirits.

To contact the reporters on this story: Paul Jarvis in London at pjarvis@bloomberg.net; Clementine Fletcher in London at cfletcher5@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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