Mallya’s Diageo Deal Said to Face India Regulator Concern

Vijay Mallya, the Indian liquor tycoon seeking cash to revive his Kingfisher Airlines Ltd., is encountering opposition from the country’s stock-market regulator to his plan to sell control of United Spirits Ltd.

The Securities and Exchange Board of India has raised objections to a clause in Diageo Plc’s 111.7 billion-rupee ($2.04 billion) takeover of the whiskey maker, according to a person involved in the discussions.

The deal, announced in November, includes an option for Mallya’s United Breweries Holdings Ltd. to sell some or all of its stake in United Spirits to Diageo within seven years at a price of 1,440 rupees a share. Such a clause constitutes a forward contract, which may not meet takeover rules, said the person, who asked not to be named because the talks are private.

The regulator’s objection comes as Mallya, 57, looks to restart flights by Kingfisher Airlines using funds from his United Breweries Group investment vehicle, which controls his stake in the carrier along with his Kingfisher beer brand and whiskey assets. Bangalore, India-based Kingfisher Airlines lost its operating license on Jan. 1 after failing to convince authorities it has enough cash to restart operations.

Purchase Terms

Diageo, the world’s biggest distiller, agreed in November to buy a majority stake in United Spirits, the producer of McDowell’s and Bagpiper whiskey. The transaction would involve United Breweries selling a 19.3 percent stake in the spirits maker. United Spirits shareholders have voted in favor of a further share allotment to London-based Diageo, which would result in the distiller having a 27.4 percent stake. Diageo would also make a mandatory open offer to acquire another 26 percent of the stock at 1,440 rupees a share.

United Spirits declined 1.3 percent to 1,879.45 rupees at the close in Mumbai. United Breweries Holdings fell 5.1 percent to 101.6 rupees, its lowest level in more than three months. Diageo rose as much as 0.8 percent and was trading up 0.5 percent at 1,797.5 pence at 1:46 p.m. in London. The stock has gained 28 percent in the past 12 months, valuing the U.K. distiller at 45.1 billion pounds ($73 billion).

“We continue to cooperate with Sebi as we address their questions during this review period,” Diageo said in an e-mailed statement. Prakash Mirpuri, a spokesman for United Breweries, declined to comment.

India’s Economic Times newspaper reported earlier today that the Securities and Exchange Board of India may raise objections to the purchase. The airline’s revival plan, which included a 6.5 billion-rupee pledge from its parent, received another setback today as an Indian Civil Aviation Ministry official said it lacked funds for payments due to airports.