Mumbai, Nov. 25: Diageo and United Spirits Ltd (USL) have offered to sell most of Whyte & Mackay — the Scotch whisky maker that Vijay Mallya had acquired with a lot of fanfare in 2007 — to quell competition concerns in the UK.

The move came after the UK’s Office of Fair Trading (OFT), the regulatory watchdog, ordered an investigation to determine whether there was any truth in complaints it had received from retailers in Britain about a possible rise in the prices of blended bottled whisky as a result of the Diageo-USL merger.

Last year, debt-mired Mallya had signed away control over the Rs 16,000 crore United Spirits Ltd to Diageo, the world’s largest spirits company.

Under the terms of the deal, Diageo will acquire a 53.4 per cent stake in USL for Rs 11,166 crore (or $2.1 billion) in a three-step process, making it the biggest in-bound merger and acquisition deal since Anil Agarwals’ Vedanta Resources Plc acquired oil and gas explorer Cairn India.

The investigation revealed that the Diageo-USL merger “may lead to a substantial lessening of competition in the supply of blended whisky to retailers,” the OFT said in a note released today.

“These companies are two of the leading suppliers of blended bottled whisky in the UK, especially to supermarkets and other large retailers,” said Chris Walters, OFT’s chief economist and the decision-maker in this case.

The investigation found that there was substantial competition in the retail sector between Bell’s whisky, a Diageo label, and Whyte & Mackay’s own label and branded blended whisky.

“We are now considering Diageo’s offer to sell the bulk of the Whyte & Mackay business with the exception of two malt distilleries to address our concerns,” Walters said.

The OFT has to make a reference to the UK’s Competition Commission if it believes that a merger will substantially lessen competition in Britain’s market. An enquiry is usually launched when a merger leads to the creation of a market share of more than 25 per cent.

In February this year, the Competition Commission of India (CCI) had approved Diageo Plc’s majority stake purchase in Vijay Mallya-led United Spirits.

USL has a first-rate international portfolio of scotch whisky such as Isle of Jura, Dalmore, Black Dog and Whyte & Mackay, which together account for 12 per cent of the company’s revenues.

The divestment of Whyte & Mackay will not cover the Dalmore and Tamnavulin malt distilleries, the two brands and the maturing inventory from these distilleries, the management and staff for each distillery and the sale of products from the two sites.

But it will cover Whyte & Mackay’s blended Scotch whisky brands, including Whyte & Mackay and the private label operations.

“The board of USL will consider the matter and decide on whatever action needs to be taken,” Prakash Mirpuri, spokesman for USL, told The Telegraph.

Whyte & Mackay’s top-selling scotch whisky brands include Dalmore, Isle of Jura and Whyte & Mackay. Diageo sells its popular Johnnie Walker Scotch whisky in India.

Mallya had plonked down £595 million for Whyte & Mackay in 2007.

Under the terms of the deal with Diageo, Mallya will stay on as executive chairman of USL and will be able to nominate another director to the company’s board as long as his stake stays above 5 per cent in the company. If his stake falls below 1 per cent, the agreement provides for Mallya’s appointment as the chairman emeritus of USL.

USL had a 41 per cent market share of the Indian spirits market in 2011, according to Euromonitor. Pernod Ricard — the world’s second-largest spirits company — was next with a 9 per cent share. Radico Khaitan and Allied Blenders and Distillers have 6 per cent each.