Road signs in the Indian Himalayas inform drivers: “After whisky, driving risky." Diageo, the UK-listed beverages group, would have been well advised to heed them.
In 2012, when emerging markets were still fashionable, it concluded a deal with Vijay Mallya to buy a 25 per cent stake in United Spirits, a Mumbai-listed company controlled by Mr Mallya. It subsequently raised its stake to 55 per cent, for a total cost of around £1.8bn.
Two years later, it has finally eased Mr Mallya out of the boardroom. His resignation did not come cheap; Diageo will pay him $75m and indemnify him against any claims arising from an inquiry into United Spirits’ accounting. The problems date back to 2014, when USL’s auditors qualified its accounts and a probe identified improprieties in transactions between USL and other parts of Mr Mallya’s business empire.
Paying the self-styled “King of Good Times” to go away removes a significant and very public distraction. It does not mean Diageo’s work is done. The company thinks Indian demand for whisky could grow at 10 per cent a year, but USL’s revenue line has grown at nothing like that rate in recent years. Its margins, before interest, tax, depreciation and amortisation, are well short of Diageo’s own, yet the total cost of the UK group’s USL stake (including Mr Mallya’s pay-off) equates to around 40 times last year’s ebitda.
The parent has put in place credible management and a sensible strategy involving extensive promotion of key brands. If USL’s ebitda for the year to March 2016 meets a consensus of Rs10.7bn (around £112m) then the acquisition multiple comes down to a more reasonable 30, and the legitimate questions about the quality of its due diligence may die down.
And for any other multinationals considering buying a minority stake in a company run by a colourful local entrepreneur, there is an alternative road sign: "Peep, peep, don’t sleep."
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