Mallya: Rekindling spirit

Mumbai, Sept. 25: Diageo and Vijay Mallya-owned United Spirits today confirmed they were in talks under which the world’s largest distiller could pick up a significant stake in the country’s biggest spirits company.

Speculation has swirled in the past few weeks about a deal between the two firms.

In an identical statement to the bourses in Mumbai and London, the two companies said: “There is no certainty that these discussions will lead to a transaction.”

The statement was issued hours before United Spirits was due to hold its annual general meeting in Bangalore where shareholders will be voting to re-elect Mallya as a director. After the AGM, Mallya refused to field any questions on the state of the talks. “I am not prepared to go beyond what we have informed the exchanges,” he said.

The United Spirits’ stock leapt to a day’s high of Rs 1,174 before closing at Rs 1,147.70 on the BSE, registering a gain of 8.89 per cent.

It wasn’t immediately clear how much Mallya was prepared to offer Diageo.

This isn’t the first time that the two sides have held talks on Diageo’s stake purchase in United Spirits. Just over three years ago, talks with Diageo had floundered after the two sides could not agree on the size of the stake that Diageo would get and its valuation.

At that time, Mallya had initially offered a 14.9 per cent stake (comprising largely treasury stock), but was open to the idea of Diageo acquiring a larger shareholding in the UB group flagship. Talks broke off at that time over the issue of control with Diageo insisting on a clear path to an eventual majority stake in United Spirits.

The treasury stock of 10.28 million shares was held by Shaw Wallace & Company, the Calcutta-based liquor company that the UB Group acquired in 2005. It was eventually sold to T. Rowe Price, Capital International Emerging Markets Fund, DWS Investment, Emerging Markets Growth Fund and Reliance Mutual Fund for Rs 905 crore.

The treasury stock was created as part of a process for the merger of Shaw Wallace into United Spirits Ltd.

The buzz now is that Mallya — who has been struggling to clean up the books of debt-ridden Kingfisher Airlines — is a lot more eager to seal a deal.

Diageo, which sells its products in more than 180 countries, is seeking to expand its presence in developing markets as sales growth wanes in its mature markets, including Europe. Its brands include Johnnie Walker, Crown Royal, JåB, Buchanan’s, Windsor and Bushmills whiskies, Smirnoff, Cîroc and Ketel One vodkas, Captain Morgan, Baileys, Tanqueray and Guinness.

The promoters have a 27.78 per cent stake in United Spirits with Mallya holding just 12,510 shares, or 0.01 per cent. His group companies — United Breweries Holdings (18.03 per cent) and Kingfisher Finvest India (9.69 per cent) — hold most of the promoters’ stake. Mallya has pledged almost 98 per cent of the promoter’s stake in United Spirits with lenders, which somewhat complicates the discussions.

United Spirits had reported consolidated net sales of Rs 9,356 crore in the year ended March 31 this year. It reported a net profit of Rs 186.65 crore. It had total borrowings of Rs 4,281.09 crore out of which Rs 3,642.79 crore came from banks.

Diageo was formed in 1997 with the merger of Guinness plc and Grand Metropolitan plc. It has a presence in India through a subsidiary called Diageo India that sells brands like Smirnoff and Johnnie Walker.

It also has a presence in the Indian Made Foreign Liquor segment through a 50:50 joint venture with Radico Khaitan.