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Last updated: November 9, 2012 7:39 pm
Diageo has reached a deal to take over India’s biggest drinks company, United Spirits, for up to £1.2bn, capping more than three years of painful on-again, off-again negotiations with mercurial liquor baron Vijay Mallya.
The acquisition will give Diageo, the world’s largest whisky distiller, access to United Spirits’ unrivalled distribution network in India, where the alcoholic beverage market is estimated at $6bn and is growing 15 per cent a year.
Diageo hopes the takeover will help it build the market for its premium Scotch brands among India’s increasingly affluent middle class. United Spirits controls nearly 60 per cent of India’s drinks market.
“Tenacity pays off,” said Paul Walsh, chief executive of Diageo.
Pulling off the Indian deal switches the focus to Jose Cuervo, the tequila brand Diageo distributes and in which it is seeking an equity ownership.
Mr Walsh, who makes no secret of his wish to own the brand, said dialogue with the family owners continue but, as with India, he said he would not rush talks and risk overpaying.
Ivan Menzies, the British group’s chief operating officer, said the deal would “transform Diageo’s position in India,” which he called “an incredibly attractive” spirits market.
Mr Mallya, whose father built United Spirits by buying distressed distilleries in the 1960s, called the deal a “dream combination” and “win-win” for both groups.
The flamboyant tycoon, who will remain chairman of the Mumbai-listed United Spirits after the deal, grew testy at suggestions that he was selling out.
“I have not sold the family silver, or family jewels,” he said. “I have only embellished them . . . If you have the impression that I have passed on control, and moved out, that is not the correct impression.”
Diageo is paying Rs1,440 per share for a stake of up to 53.4 per cent in United Spirits. The price represents an enterprise value/earnings before interest, tax, depreciation and amortisation multiple of 20 times last year’s ebitda – high for deals in the sector but not out of kilter with multiples paid in India.
The complex terms of the takeover call for the UK company to buy 19.3 per cent of United Spirits’ existing shares from Mr Mallya’s personal and related holdings, and for United Spirits to issue new equity, amounting to 10 per cent of the expanded capital base, to Diageo.
Together, these steps will give the UK group an initial 27 per cent stake in the Indian company.
Diageo will also launch an open offer for another 26 per cent stake in the enlarged share capital to take a total holding of up to 53.4 per cent. Mr Mallya will be left with 13.5 per cent of the Indian drinks group’s expanded equity.
Mr Walsh said Diageo would cover its 12 per cent cost of capital in the sixth year after the deal, not a long payback period for a high growth emerging market. However, initial synergies will be limited as it will continue to be run as a domestic business. India’s high import duties, for now, make it virtually prohibitive for international distillers to sell foreign brands.
The deal will give United Spirits about $611m in cash to help reduce its debts and Mr Mallya around $444m in cash, which he could use to help revive his grounded airline, Kingfisher.
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