Diageo Says It’s In Talks With United Spirits on Stake

Diageo Plc confirmed that it’s in talks to buy a stake in billionaire Vijay Mallya’s United Spirits Ltd., a deal that would help the world’s biggest distiller build its presence in the Indian whiskey market.

The two companies disclosed the discussions in a statement to the London and Bombay stock exchanges today ahead of Bangalore-based United Spirits’ annual general meeting, without disclosing the size of the investment. There is no certainty the negotiations will lead to a deal, the companies said. Bloomberg reported last week that the companies were in advanced talks.

United Spirits is the largest distiller in India, and sells Indian-made foreign liquors as well as some Scotch whisky brands including Whyte & Mackay, which it bought in 2007. Mallya needs money to help finance his Kingfisher Airlines Ltd., which is struggling with losses and a cash shortage, and Diageo is seeking to expand in developing markets as sales growth wanes in more mature markets including Europe.

“A deal with United Spirits would provide Diageo with a stronger route to market in India, which has a fast-growing emerging middle-class consumer,” Phil Carroll, an analyst at Shore Capital in London, wrote today. “On the face of it, we believe today’s announcement is good news.”

Expansion Push

Diageo has made acquisitions, including purchasing Turkey’s Mey Icki raki brand for about $2.1 billion last year, as part of the London-based company’s push to expand in emerging markets and to gain 50 percent of its net sales from developing regions by 2015. It already sells its brands such as Johnnie Walker Scotch whisky in India and competes with companies including Pernod Ricard SA. India is the largest whiskey market in the world.

United Spirits’s shares gained 8.9 percent to 1,148.7 rupees, the highest since February 2011, at the end of Mumbai trading today. The stock was the biggest gainer on the 10-stock BSE Fast Moving Consumer Goods Index. The distiller’s shares have more than doubled this year, valuing the company at 150.2 billion rupees ($2.8 billion). Diageo’s shares advanced as much as 2.2 percent in London and were up 1.6 percent at 1,752 pence at 12:56 p.m., giving the company a market value of 43.9 billion pounds ($71.3 billion).

Kingfisher Airlines rose 7.9 percent to 14.4 rupees, the highest level since May 8.

Negotiations Ongoing

Diageo was in advanced talks on a stake purchase in United Spirits, four people with knowledge of the matter said on Sept. 21. Mallya owns 28 percent of the distiller, and will remain a United Spirits shareholder, the people said. Diageo may get the right to appoint a majority of United Spirits’s board members, including the chairman, one person said. Talks between Diageo and United Spirits about three years ago collapsed due to disagreements about price.

Today’s announcement “has been discussed in the press recently and has been speculated about widely over time so should come as little surprise to the market,” Anthony Bucalo, an analyst at Banco Santander SA in London, wrote. “If a deal is struck, the key question now will be the price tag for the business, with previous talks held in 2009 coming to an end after United Spirits were unhappy with Diageo’s assessment of fair value.”

Kingfisher needs a capital injection of $600 million in the next two months, industry consultant CAPA Centre for Aviation said in August. Mallya gave 59 billion rupees of guarantees last year to Kingfisher’s lenders, according to the company’s annual report.

Cash Shortage

The carrier’s cash shortage has forced it to reduce services and ground planes. Indian airlines have lost money because of high fuel costs and a price war even as rising disposable incomes boost travel.

“It is becoming increasingly urgent for UB Group to refinance its subsidiaries,” Laetitia Delaye, an analyst at Kepler Capital Markets in Paris wrote. Selling a 25 percent to 26 percent stake in United Spirits to Diageo could free about 500 million pounds, she said.

United Spirits may benefit from the sale of shares to Diageo, as it would get access to expertise and a wider international distribution network for its own brands. Diageo would gain access to India’s market for spirits, which was estimated at $3.9 billion in 2011, according to Nomura.

Interstate Tariffs

The deal “would also enable Diageo to work more easily around the complex structure of interstate tariffs in the country due the way United Spirits is setup in each state,” Shore Capital’s Carroll wrote. Foreign-made alcohol is taxed in each state as well as on import to India and imported spirits represent only 1 percent of the market as tariffs still make them unaffordable for most consumers, according to Delaye at Kepler.

United Spirits reported a group loss of 394 million rupees in the quarter ended June 30, compared with a 1.1 billion-rupee profit a year earlier. The company’s sales were lower in the quarter due to the effect of an increase in excise duties in West Bengal state in the last fiscal year, and because of lower sales to the southern state of Tamil Nadu, it said in a statement.

Buyers paid a 23 percent premium on average in 227 global wine and spirits deals announced over the last three years, according to data compiled by Bloomberg. Diageo was the most acquisitive company in the period.

Mallya declined to comment further on the situation after the shareholder meeting.

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