Diageo to launch second open offer to acquire 55% in United Spirits - Livemint

Diageo is currently the largest shareholder in USL with a 28.78% stake, much lower than the 53.4% it originally sought, while UBHL and other promoter firms own 11.08%. Photo: Wikimedia Commons

Bangalore/Mumbai: Diageo Plc is offering to pay as much as Rs.11,449 crore to boost its stake in United Spirits Ltd (USL) to nearly 55% through a second open offer, as the world’s largest liquor company seeks to remove uncertainty about its position as USL’s dominant shareholder—albeit at a significantly higher cost than it estimated earlier.

Diageo, the maker of Johnnie Walker Scotch Whisky and Smirnoff vodka, on Tuesday said it would offer to buy 26% in USL from public shareholders at a price of Rs.3,030 per share, more than double the Rs.1,440 per share it offered to pay in its first open offer in November 2012. That offer failed as USL’s public investors held out for a much higher price.

“The price is at a significant premium to USL’s closing price on Friday and it’s much, much higher than last time so I think this offer is likely to be far more successful,” said Abneesh Roy , a research analyst at Edelweiss Securities. “It will bring more comfort within the company and to the market as it will remove any doubts about Diageo’s ownership position in USL. I expect Diageo to accelerate things like transfer of technology and processes to USL and bring in more of their premium brands through USL after this.”

The London-based distiller, along with USL promoter United Breweries Group, is fighting a case in Supreme Court of India against several UB Group lenders to maintain ownership of 7% of USL it bought from United Breweries (Holdings) Ltd (UBHL), the UB Group’s holding company.

UB Group lenders have filed winding-up petitions against UBHL, citing non-payment of debt owed by UB Group-promoted Kingfisher Airlines Ltd .

Eight months after the deal was first announced, Diageo completed buying 25.02% of USL from the company, its promoter UB Group and public shareholders last July, and has since raised its stake in USL to nearly 29% by buying shares from the open market.

Diageo estimated it would pay Rs.11,166.5 crore for a 53.4% stake in USL when it announced the deal in November 2012. So far, it has paid Rs.6,574 crore for nearly 29% of USL. If its second open offer is fully subscribed, Diageo will end up shelling out Rs.18,023.13 crore for a 54.8% stake in USL, which has been losing market share to rivals such as Pernod Ricard Pvt. Ltd and Allied Blenders and Distillers Pvt. Ltd over the past year.

“Diageo is paying an exorbitant amount for a business that is not particularly attractive currently,” said Sunita Sachdev, analyst at UBS Securities India. “One possibility is that Whyte & Mackay may fetch a higher price than what the market is expecting (around £350 million). The other reason is that they may want to take their stake higher in the future and believe they can turn it around. But all this will take a long time and over the short term, I think USL will continue to struggle on margins and premiumization.”

Diageo is in the process of selling the Whyte & Mackay whisky business after the UK’s competition authority, The Office of Fair Trading (OFT), raised concerns in November 2013 about the impact of its acquisition of USL on whisky prices in that country.

Deirdre Mahlan , global chief financial officer and executive director at Diageo Plc, said in an interview that the company was offering an “attractive” price, and the open offer was a “unique opportunity for large (share) holders” of USL to monetize their investments.

“Of course, our existing shareholders agreement (with USL) has economic interests along with some rights under the same agreement. But, what a direct increase in shareholding gives us is our confidence on ownership over the long term,” Mahlan said.

The second open offer will start on 11 June and close on 24 June and will be funded by cash and debt.

The new open offer price represents a premium of 22.5% to the price at which Diageo last acquired USL shares on 31 January 2014; a 20% premium to the 60-day volume weighted average price for USL; and an 18.49% premium to Friday’s closing price of USL shares.

HSBC Securities and Capital Markets (India) Pvt. Ltd and JM Financial Institutional Securities Pvt. Ltd acted as joint managers to the offer and joint financial advisers to Diageo. Bank of America Merrill-Lynch also provided financial advice.

Even as Diageo has been increasing its ownership in USL, the Indian company’s former controlling shareholder Vijay Mallya and his UB Group have been losing their grip over USL. The UB Group companies now control less than 9% of USL as lenders to the UBHL and Kingfisher Airlines have been selling the USL shares pledged against borrowings.

Diageo already controls USL management through an agreement with the UB Group that gives it the right to appoint the CEO and CFO at USL. The company announced in October 2013 that Anand Kripalu , president of South Asia and Indo-China at Cadbury India Ltd , would take over from Ashok Capoor as CEO and managing director of USL. Kripalu will take up the CEO’s role from 1 May.

Shares of USL closed 11.58% up at Rs.2,853.15 on Tuesday on a day the benchmark Sensex fell 0.64% to 22,484.93 points.