Mallya

Mumbai, Nov. 9: Debt-mired liquor baron Vijay Mallya has finally had to swallow the bitter brew.

On Thursday, Mallya signed away control over the Rs 16,000-crore United Spirits Ltd (USL) to Diageo, the world’s largest spirits company.

USL is the jewel in the UB crown and owns big-ticket brand McDowell — touted as the world’s largest whisky brand with sales of over 16 million cases — and Old Monk Rum in addition to 22 cheap but popular “millionaire” brands that sell over 1 million cases a year.

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

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), making it the biggest in-bound merger and acquisition deal since Anil Agarwal’s Vedanta Resources Plc acquired oil and gas explorer Cairn India last year.

“I have not sold the family jewels; I have only embellished them,” Mallya told reporters during a conference call after the deal was announced.

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.

“I am delighted at the opportunity that Diageo has to be part of India’s large and growing local spirits market,” said Diageo chief executive officer Paul S. Walsh.

“The combination of USL’s strong business with the capabilities which Diageo brings as the world’s leading premium drinks company will ensure USL continues to lead the industry in India.”

Diageo already sells its Johnnie Walker whisky and Smirnoff vodka brands in India. Walsh, however, said the two portfolios would be kept separate at least initially.

The deal will be transacted in three phases. In the first phase, Diageo will acquire 25.23 million shares for a 19.29 per cent stake in the company at a price of Rs 1,440 per share. This works out to a premium of 5.9 per cent above USL’s closing price of Rs 1,359.70 on the Bombay Stock Exchange today.

Diageo will be buying 12.8 per cent from United Breweries Holdings Ltd and another 6.5 per cent “interest” in USL from the USL Benefit Trust, two USL subsidiaries and the SWEW Benefit Trust, created for senior employees of the group.

Diageo is routing the transaction through a wholly owned Dutch subsidiary, Relay BV.

In the second stage, shareholders of USL will be asked to approve a resolution allowing the company to make a preferential allotment of shares to Diageo to boost its stake to 27.4 per cent, automatically triggering a mandatory open offer to minority shareholders in the company.

Under the take-over rules, a company that acquires more than 25 per cent of the equity has to make an offer to buy another 26 per cent at the same price as it offered the promoters.

Diageo has indicated that it would be ready to buy a maximum of 37.78 million shares through the open offer.

Mallya has tried to hammer out a deal with Diageo several times in the past. Three years ago, the talks floundered as the two sides could not agree on the stake that Diageo would acquire and the price for the buyout.

Diageo had insisted on a controlling interest in all its recent buyouts in Brazil, China and Turkey and it wasn’t prepared to make an exception in USL’s case. Mallya had always baulked at the idea of selling a controlling interest in the company, which traces its origins to McDowell and Company, established as a trading firm in 1826 by a Scottish freebooter named Angus McDowell.

Vittal Mallya — Vijay’s father — acquired McDowell and Company in 1951 and went on to create the country’s largest spirits company.

United Spirits has a 43 per cent share in India’s whisky market.