DIAGEO has agreed to buy a majority stake in United Spirits Ltd, controlled by Indian businessman Vijay Mallya, for $2.1bn, fuelling a push by the world's biggest spirits group into fast-growing markets.
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 earnings per share from the second year.
"Clearly this is a business that can grow very fast and where profitability can double easily within four or five years, so...I don't think this is an expensive deal at all," said Ian Shackleton, analyst at Nomura International.
If the deal gets regulatory and shareholder approval, it will be the biggest inbound Indian M&A deal since British oil firm Cairn Energy Plc sold a majority stake in its Indian business to Vedanta Resources Plc 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.
"We are working towards a comprehensive rehabilitation plan including recapitalisation of the airline. It would be unfortunate if you would try to link this transaction with the airline," he told reporters.