Diageo to Pay $2.04 Billion for Control of United Spirits

By George Smith Alexander and Malavika Sharma - Nov 9, 2012

Diageo Plc (DGE), the maker of Johnnie Walker Scotch, will buy a 53.4 percent stake in India’s United Spirits Ltd. (UNSP) for 111.7 billion rupees ($2.04 billion) to gain leadership in the world’s largest whiskey-consuming nation.
The U.K. distiller will acquire a 27.4 percent stake at 1,440 rupees per share and will then make an offer for a further 26 percent, the companies said today. They first disclosed that they were in discussions in September.
United Spirits Chairman Vijay Mallya and others are selling a 19.3 percent stake in the maker of McDowell’s No. 1 whiskey as his unprofitable Kingfisher Airlines Ltd. (KAIR) struggles with a cash shortage. The Indian distiller has a leading 43 percent share of the country’s whiskey market, which Euromonitor International estimates will grow by about 50 percent to $31.1 billion in the five years through 2016.
“It will be a win-win for both,” said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. in Mumbai ahead of the announcement. “Diageo will get a foothold into the company and the Indian market, and the Mallya group will get the money to pay the debt of Kingfisher.”
Diageo, which already sells its Johnnie Walker whiskey and Smirnoff vodka brands in India, will benefit from United Spirits’ distribution network and the company’s experience with negotiating complex rules that govern India’s liquor business, according to P. Phani Sekhar, a fund manager with Angel Broking.

Shares Gain

“The liquor business is a very high entry-barrier business because of the state-level regulations,” he said. “This business has been cracked by Mr. Mallya over a period of time.”
Diageo is paying about 20 times United Spirits earnings before interest, taxes, depreciation and amortization in the period ended March 31, 2012, it said. That compares with a median of about 17 times for comparable transactions in the last 10 years, according to data compiled by Bloomberg.
“If you look at emerging-market transactions in the consumer space, this multiple is not out of line,” Diageo Chief Financial Officer Deirdre Mahlan said on a conference call today. “There is no doubt that India is one of the most exciting, if not the most exciting market in Asia. So the multiple reflects the value we can deliver.”
The price is “high, but it’s not outrageous,” said Trevor Stirling, an analyst at Sanford C. Bernstein in London.
Diageo advanced 0.4 percent to 1,796 pence as of 3:30 p.m. in London trading. United Spirits’ shares rose 1.3 percent to 1,360.5 rupees at the close of trading in Mumbai, after gaining as much as 6.1 percent earlier in the day.

Emerging-Market Growth

Diageo is seeking growth in markets outside Europe, as part of its plan to get half of its net sales from developing markets by 2015. The distiller is keen to make acquisitions in the Asia- Pacific region, Gilbert Ghostine (BSETMCG), president for the region, said in an Oct. 1 interview. The company gets about 14 percent of sales from Asia-Pacific and is “on track” to raise emerging- markets revenue to 50 percent from 40 percent, he said then.
“This business has already got very good brands, and it’s got very good routes to market,” Diageo Chief Executive Officer Paul Walsh said in a Bloomberg TV interview. “But I do believe we can step up our expertise in marketing, in innovation and at the right time we can leverage those routes to markets for our global brands.”
Diageo had only 0.1 percent of the Indian whiskey market in 2011, behind Pernod Ricard SA’s 15 percent, Euromonitor said.

Diageo Deals

The U.K. company, which is funding the acquisition through existing cash resources and debt, has no plan to take its ownership of United Spirits to 100 percent or to integrate the businesses, Mahlan said on the call. “Given that we are acquiring a distinct and separate business, there is not a significant amount of cost synergies,” she said.
Before today’s agreement, Diageo had announced 12 deals valued at $2.87 billion over the last three years, including Turkey’s Mey Icki raki brand for about $2.1 billion last year. Walsh said today he would still like to gain control of tequila brand Jose Cuervo.
“In the last couple years this company has become much more acquisitive and people will have to say that that is a good thing,” said Chris Wickham, an analyst at Oriel Securities.
Over the last three years there were 223 deals announced globally with wine and spirits companies as targets, according to data compiled by Bloomberg. The average premium was 23.3 percent, according to that data.
United Spirits today reported second-quarter net income declined 73 percent to 392.7 million rupees, as the cost of raw materials increased. Revenue increased 24 percent to 22.2 billion rupees in the three months ended Sept. 30 from a year earlier, the company said in a statement.

Mallya

Speaking a conference call, Mallya said he wouldn’t comment on what the United Spirits deal means for Kingfisher Airlines. The airline’s largest lender this month said that the carrier should raise at least $1 billion of fresh capital. The airline, which halted flights in October, is also working on a turnaround plan as it seeks to persuade regulators to re-activate its suspended license.
Mallya has an option to sell his remaining shares to Diageo at the same price for the next seven years, according to the statement, provided that such a sale wouldn’t trigger Diageo needing to make a further tender offer for United Spirits.
The United Spirits chairman will hold 14.9 percent of the company after selling the 19.3 percent stake to Diageo.
JM Financial Ltd. (JM), Bank of America Merrill Lynch and UBS AG advised Diageo on the deal, while Citigroup Inc. and Ambit Corporate Finance Lts acted on behalf of United Spirits.
To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Malavika Sharma in New Delhi at msharma52@bloomberg.net
To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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