Diageo Offers $1.9 Billion in 2nd Bid to Control United Spirits

Diageo Plc offered to pay 114 billion rupees ($1.9 billion) to gain control of United Spirits Ltd. in a second attempt to extend its reach in the world’s largest whiskey market. United surged to a record.

The London-based maker of Johnnie Walker scotch and Smirnoff vodka offered to buy as much as 26 percent of India’s biggest spirits company for 3,030 rupees a share, aiming to boost its shareholding to as much as 55 percent, Diageo said in an e-mailed statement today. That compares with the 1,440 rupees it offered shareholders in its last open offer in November 2012.

Diageo’s bid reflects the company’s attempt to grow in a market that’s relatively underpenetrated compared to the West, and is expected to grow “by leaps and bounds,” Bharat Chhoda, analyst at brokerage ICICI Direct, said in an interview. The acquisition of Bangalore, India-based United Spirits is the country’s largest consumer products deal in a year and comes as rival Pernod Ricard SA seeks to tap developing economies.

The purchase “shows the kind of confidence Diageo has in the business model of United Spirits,” Gaurang Shah, assistant vice president at Geojit BNP Paribas Financial Services Ltd., said on Bloomberg TV India today. “With the balance sheet strength that Diageo has, it’s only going to be a one-way growth for the company.”

United Spirits jumped 12 percent to 2,853.95 rupees in Mumbai, the highest closing level since its 2001 listing. The shares have gained 9.4 percent this year, while the benchmark S&P BSE Sensex gained 6.2 percent. Diageo slipped less than 0.1 percent to 1,916.50 pence as of 1:28 p.m. in London.

Relative Value

The offer is 18 percent more than United Spirits’ closing price on April 11. Only 0.4 percent of shareholders subscribed to the first bid in 2012.

“The premium is decent, but it may not get an overwhelming response from the shareholders,” said Ambareesh Baliga, managing partner of global wealth management with Edelweiss Financial Services Ltd. in Mumbai. Lenders that hold United Spirits stock as collateral for overdue debt from United Breweries Holdings’ group companies may tender their shares in this offer, he said.

Today’s deal values the target at about 39 times earnings before interest, taxes, depreciation and amortization in the past 12 months, according to data compiled by Bloomberg. That’s more than double the 16 times multiple for 16 takeovers in the same industry over the past five years, the data show.

United Spirits controls about 40 percent by volume of India’s spirits market, which includes whiskey, vodka and rum, according to Euromonitor data. Indian has the world’s largest number of whiskey drinkers, who cumulatively consumed 1.5 billion liters of the liquor last year, according to the data provider.

Cementing Control

Diageo has cash and near cash items of 1.77 billion pounds ($3 billion), according to data compiled by Bloomberg. The current offer price is “fairly attractive” and follows Diageo’s stated goal of gaining a majority stake in United Spirits, Manish Jain, an analyst at Nomura Holdings Inc., said in a note to clients.

“For long-term shareholders, we think it would make sense to hold on to the shares,” as earnings in three to four years can exceed current projections, Jain said.

The beverage maker has no plan to take United Spirits private and the offer today will give it “certainty of control,” Diageo Chief Financial Officer Deirdre Mahlan said in a telephone interview today. The deal will be funded by commercial paper and longer-term debt, she said.

No Surprise

JM Financial Ltd. and HSBC Holdings Plc acted as joint managers to the offer and Bank of America Corp. also provided financial advice to Diageo, according to today’s statement. The tendering period is set to start June 11, the company said.

“Overall, this comes as no surprise, and it highlights to us the extent that Diageo wants to tidy up this deal, which has been rolling on longer than initially expected,” Phil Carroll, an analyst at Shore Capital Stockbrokers Ltd. in Liverpool, England, said in an interview.

Indian-born Diageo Chief Executive Officer Ivan Menezes took over last year from Paul Walsh, whom he worked with to help engineer a deal to buy a stake in United Spirits, as the company seeks to gain 50 percent of its sales from so-called fast-growth emerging markets as European sales wane.

Diageo’s efforts to buy a controlling stake in United Spirits, which was owned by Indian liquor-to-airlines tycoon Vijay Mallya, have been complicated by the latter’s legal battle with creditors. Shares of the spirits maker had been offered as collateral for Kingfisher Airlines Ltd., which has defaulted and ceased operating.

Whyte & Mackay

As well as Johnnie Walker, the world’s biggest whisky brand, Diageo also sells malt whiskies including Caol Ila and Talisker and blended brands such as Buchanans and J&B.

Diageo in November said it offered to sell most of United’s Whyte & Mackay business to assuage concerns by the U.K. Office of Fair Trading that the acquisition might potentially lead to higher prices in the U.K. for blended whiskey. The sale is being managed by United Spirits and that process is underway, Mahlan said today, without giving further details.

United Spirits bought Whyte & Mackay, the maker of Scotch whisky including Jura and The Dalmore, for 595 million pounds in 2007.

Diageo narrowed the bidders for its Whyte & Mackay spirits business to suitors including Lion Capital LLP, KKR & Co. LP, Thai Beverage PCL, Davide Campari-Milano SpA and a Russian company, people familiar with the matter said last month. The transaction may value the business at about 400 million pounds, the people said. The final round of offers is expected by April 17, they said.

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