Diageo to buy up to 53.4% of United Spirits in a $2.1B deal

Diageo, the world’s largest spirits company by revenue, has signed a deal to acquire up to 53.4 per cent of United Spirits Ltd, the world’s largest spirits player by volume, in a multi-tiered transaction worth as much as $2.1 billion. Following completion of these agreements, UB Group chief Vijay Mallya will continue in his current role as chairman of United Spirits.

VCCircle had first reported about the transaction on July 12, 2012, and we had also said that the UB Group might not sell the entire stake it held.

As per the deal, in the first leg, Diageo is acquiring 19.3 per cent stake in United Spirits from existing shareholders including the UB Group and the treasury stock of United Spirits (held by two subsidiaries of the company) at Rs 1,440 per share (VCCircle had said on Thursday that the deal would be struck at Rs 1,464 a share as against market rumours of over Rs 1,500 a share) or a total of Rs 3,632.7 crore (around $670 million).

The promoters who currently own 27.78 per cent in United Spirits (not counting the treasury stock representing 6 per cent of the firm), will be holding 14.9 per cent in the firm, but it will further shrink to 13.4 per cent post the preferential allotment to Diageo.

Diageo will also buy fresh shares of United Spirits, giving it another 10 per cent of the diluted equity base for Rs 2,092 crore ($385 million).

These two transactions will give Diageo a combined stake of around 27.4 per cent (post dilution) for Rs 5,725 crore ($1.05 billion).

Since the acquisition would cross the 25 per cent trigger for mandatory open offer, Diageo will also come up with an offer to buy another 26 per cent stake which may cost it up to Rs 5,441 crore (or a shade above $1 billion). This may push the total deal amount to Rs 11,166.5 crore ($2.05 billion).

This represents a 20x multiple of United Spirits’ EBITDA for the year ended 31 March, 2012, and the transaction would be EPS accretive in the second year and economic profit-positive in the sixth year of the transaction assuming a 12 per cent WACC, according to Diageo.

Post-acquisition, India will become the second largest market in Diageo’s portfolio. Ivan Menezes, chief operating officer of Diageo Plc, said, “After the USL transaction, it has the potential to become the largest market share in Diageo’s portfolio in the long term.”

Diageo and Vijay Mallya have also entered into a memorandum of understanding under which they will form a 50:50 joint venture, which will own United National Breweries’ traditional sorghum beer business in South Africa.

Diageo’s investment for its 50 per cent interest in the joint venture is expected to be approximately $36 million. Diageo and Mallya are also considering the possibility of extending this joint venture to certain emerging markets in Africa and Asia (excluding India).

Paul S Walsh, chief executive of Diageo, said, “As a result of the agreements, we are announcing today we will be well-positioned to take the growth opportunities presented by a spirits market where growth is driven by the increasing number of middle-class consumers. USL’s No. 1 position in local spirits, together with our growing international spirits business of leading brands, will enable us to grow across the consumer space as India’s increasing number of middle-class consumers look to enjoy premium and prestige local spirits brands as income levels rise.”

While the deal will help the UB Group pay off lenders for its pledged shares (the group held 27.78 per cent in United Spirits as of September 30, 2012, and almost the entire stake was pledged with financial institutions), the fresh cash infusion will also help United Spirits cut its debt. Bulk of the promoter group stake is held with another public-listed firm United Breweries (Holdings) Ltd (UBHL).

Vijay Mallya, chairman of the UB Group, said, “I have had a long association with Diageo and, therefore, I am confident that this winning partnership with Diageo provides USL with the best possible platform for future growth. I am delighted to remain a part of that journey as chairman of USL as we work together to build continued value for the shareholders of USL and UBHL.”

For the UB Group, Citigroup Global Markets acted as the lead financial advisor; Ambit Corporate Finance advised UBHL on tax and structure-related issues and Amarchand and Mangaldas & Suresh A. Shroff & Co. acted as the lead legal adviser.

Herbert Smith Freehills LLP was the legal advisor on matters of English Law and Kanga & Co provided the legal due diligence process.

For Diageo, JM Financial acted as the lead transaction and financial advisor on the transaction while BofA Merrill Lynch acted as the joint financial advisor. UBS also provided financial advice to Diageo.

Slaughter and May and Platinum Partners acted as legal advisors to Diageo. Deloitte provided financial and tax due diligence services.

United Spirits’ scrip closed at Rs 1,359.7 a share, up 1.22 per cent on the BSE in a weak Mumbai market on Friday.

United Spirits draws its strength from whisky brands like Royal Challenge, McDowell’s, Bagpiper and Antiquity. It also has Scotch brands like Whyte & Mackay, Black Dog, Dalmore and Jura besides McDowell’s No 1 rum and White Mischief vodka. In the wine segment, it has Bouvet-Ladubay and Four Seasons.

For the financial year ended March 2012, the company saw its consolidated revenues rise to Rs 9,356.08 crore while its net profit stood at Rs 187.9 crore.

For Diageo, it is a big coup against its global competitor, Pernod Ricard, which is much bigger in India with brands like Royal Stag and Imperial.

However, the question is whether the deal would clear the hurdle at European antitrust authorities, given Diageo’s strong presence in the continent, and whether Diageo's position would be strengthened with the addition of Whyte & Mackay, a key portfolio under United Spirits.

(Edited by Sanghamitra Mandal)