Business World

Tuesday 16 September 2014

Diageo to tap into emerging markets with Indian deal

Sumeet Chatterjee and Anjuli Davies

Published 10/11/2012 | 05:00

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DIAGEO has agreed to buy a majority stake in United Spirits Ltd, controlled by Indian businessman Vijay Mallya, for $2.1bn (€1.65bn), fuelling a push by the world's biggest spirits group into fast-growing markets.

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Diageo, which first tried to buy United Spirits in 2008, said it would end up with 53.4pc of India's largest spirits company in a two-part deal.

The Johnnie Walker and Guinness owner has been focusing on emerging markets where a growing middle class is developing a taste for more expensive drinks. Diageo has also been in talks to buy leading tequila maker Jose Cuervo.

"This (India) will become Diageo's number two market after the United States and if you look at the projections on what's happening with the emerging middle class . . . it has the potential in the long term to become our largest market," said Diageo chief operating officer Ivan Menezes.

Diageo said it would fund the acquisition with cash and debt and expected no damage to its single-A credit rating -- or its ability to make further acquisitions.

It added that the deal, which values United Spirits at 20 times EBITDA, would increase earning per share from the second year. If the deal gets regulatory and shareholder approval, it will be the biggest inbound Indian M&A deal since British oil firm Cairn Energy sold a majority stake in its Indian business to Vedanta Resources last year.

The main regulation issue is around United Spirits' Whyte and Mackay whisky, which Diageo -- the world's biggest scotch company -- would likely have to sell. Diageo chief executive Paul Walsh said the takeover did not hinge on Whyte and Mackay.

Mallya, who styles himself as 'King of the Good Times', played down any link between the United Spirits sale and problems at his Kingfisher airline, which has been grounded by debts, safety concerns and unpaid staff.

Mallya will stay on as chairman of United Spirits while Diageo will name the top executive team. United Breweries (Holdings) Limited (UBHL) will keep 14.9pc of the company.

Diageo will acquire 27.4pc of United Spirits from its founders and a packet of new shares for 1,440 rupees -- a premium of around 7pc to Thursday's close.

Diageo will then launch a mandatory offer for another 26pc on the open market. If it fails to buy outright control, UBHL would vote with Diageo on decisions for four years.

UBHL has an option to sell its remaining shares to Diageo from the end of the first full year of control for seven years.

Diageo -- which also owns Baileys liqueur and Smirnoff vodka -- makes about 40pc of sales in emerging markets and had aimed for 50pc by 2015. Chief executive Walsh told a conference call that he would now reset that goal. (Reuters)

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