Diageo Said to Be in Advanced Talks for United Spirits Stake

Diageo Plc, the world’s biggest distiller, is in advanced talks to buy a stake in billionaire Vijay Mallya’s United Spirits Ltd., four people with knowledge of the matter said.

The two companies may announce a deal by next month, said one of the people, who asked not to be identified as the talks are confidential. Mallya, who owns 28 percent of India’s second-largest maker of alcoholic beverages by market value, will remain a United Spirits shareholder, the people said.

As part of the deal, which is yet to be finalized, Diageo may get the right to appoint a majority of United Spirits’s board members, including the chairman, one person said. Mallya is currently chairman of United Spirits, the maker of McDowell’s whiskey. United Spirits shares have doubled this year, giving the company a market value of 130 billion rupees ($2.4 billion).

“The real attraction here for Diageo is to acquire a large platform in local spirits which will allow it to capture the lion’s share of growth of Scotch in India,” Ian Shackleton, an analyst at Nomura in London, wrote today. “With talks underway to reduce tariff barriers on Scotch in India, we see the profit upside could be enormous,” he said. The Indian market for spirits was $3.9 billion in 2011, Nomura estimates.

Mallya, 56, needs money to help finance his Kingfisher Airlines Ltd., which is struggling with losses and a cash shortage. He gave 59 billion rupees of guarantees last year to Kingfisher’s lenders, according to the company’s annual report. The carrier needs $600 million in the next two months, industry consultant CAPA Centre for Aviation said in August.

Diageo Acquisitions

Diageo has made acquisitions including Turkey’s Mey Icki raki brand as part of its push to expand in emerging markets and cash in on booming economies that are increasing the number of people with disposable income to spend on consumer goods. Its talks in 2009 to take a minority stake in United Spirits collapsed after the Indian distiller said Diageo’s offer wasn’t at a fair value.

“There’s no proposal of this nature before the board of United Spirits,” company spokesman Prakash Mirpuri said in an e-mailed response. Rowan Pearman, a spokeswoman for Diageo, declined to comment on the transaction.

United Spirits’ shares were up 5.5 percent at 993.7 rupees at the close of trading in Mumbai. Diageo was little changed in London trading, giving the company a market value of about 43 billion pounds ($69.9 billion).

United Spirits’s profit in the three months ended June 30 rose 5.3 percent to 1.45 billion rupees. Sales increased 6.3 percent, the company said.

Scotch Portfolio

Diageo already distributes its brands in India through its own network, and sales grew 24 percent in the country in the year through June 30, the company said, driven by “strong momentum across the scotch portfolio.” Diageo introduced a locally made whiskey, Rowson’s Reserve, last year to compete with other local brands owned by United Spirits and competitor Pernod Ricard SA, and sells Johnnie Walker there.

Mallya has been seeking new financing for Kingfisher as it struggles under a debt pile after posting at least five straight annual losses. The airline has cut two-thirds of services, grounded planes and halted international flights in a bid to reverse losses. India’s Commerce Minister Anand Sharma announced Sept. 14 that overseas airlines may be allowed to buy as much as 49 percent of domestic carriers.

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