Business Irish

Monday 16 December 2019

Diageo bids for controlling stake in Indian drinks giant

The rooftop bar at the Four Seasons hotel in Mumbai. Diageo is seeking to cash in on India's wealthy consumers
The rooftop bar at the Four Seasons hotel in Mumbai. Diageo is seeking to cash in on India's wealthy consumers

Sumeet Chatterjee, Nandita Bose and Martinne Geller

GUINNESS maker Diageo has launched a $1.9bn (€1.4bn) bid to nearly double its stake in United Spirits, offering a rich price in the hope that India's increasingly wealthy consumers will drink more alcohol.

If successful, Diageo would end up with 54.8pc of India's largest spirits company, which was previously controlled by tycoon Vijay Mallya. He has shed assets under heavy debt and the collapse of his Kingfisher Airlines Ltd, but remains chairman of United Spirits.

The spirits market in India was worth €11.9bn ($16.4 billion) in 2012, according to research firm IWSR, and is being driven by growth of premium and super-premium brands. The maker of Johnnie Walker Scotch and Smirnoff vodka, which already has 28.8pc of United Spirits and management control, yesterday offered to buy shares at 3,030 rupees ($50.30), a premium of 18.5pc to their last closing price, sending the stock up nearly 12pc.

If fully subscribed, Diageo's offer would represent a multiple of 38 times United Spirits' EBITDA (earnings before interest, taxes, depreciation and amortisation) for the year ended March 2013, which is much higher than even the industry's most expensive deals.

Japan's Suntory agreed in January to pay over 20 times earnings for Beam Inc, which was close to the record 20.8 times that Pernod Ricard paid in 2008 for the maker of Absolut vodka. Analysts said earlier this month that Remy Cointreau could fetch up to 22 times earnings, due to its high-end portfolio of cognac.

"When you see a multiple like that, you draw your breath a little," said Trevor Stirling, an analyst at Bernstein Research. "But I'm inclined to give Diageo the benefit of the doubt," he said, since Diageo is not known to be profligate when it comes to acquisitions.

Indeed, Diageo walked away from distributing Jose Cuervo tequila last year after failing to reach a deal for an equity stake with the brand's Mexican owners. India is a key battleground for global consumer goods firms, including spirits makers, who are increasingly looking to emerging markets to offset sluggish growth in Europe and North America.

Diageo generates about 42pc of its revenue from emerging markets but aims to lift that figure.

Aside from United Spirits, it has acquired businesses in Brazil, Turkey, China and Guatemala and last month reshaped its management to focus more on China and India.

Diageo said the investment in United Sprits would lift its earnings on a per-share basis in the year ending June 30, 2016.

Two-thirds of Indians do not drink alcohol at all, but rapid urbanisation, a young population and a fast-growing middle class are changing consumption habits. (Reuters)

 

Irish Independent

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