United Spirits, Diageo set to raise a toast

The deal between British liquor giant Diageo and Vijay Mallya-led United Spirits is likely to be announced on Thursday, according to people close to the development.

Diageo is to pick up a 25% stake in Mallya’s firm, the people said, adding, the deal would be closed in three tranches and could take 5-6 months to complete.

As per the terms of the transaction, the promoters will sell around 1.35 crore shares, or 77.5% of their stake, in UB Holdings, which in turn owns 2.35 crore shares, or 18.03% stake, in United Spirits.
In the second tranche, Diageo will buy 2.64% treasury stocks of United Spirits, owned by USL Benefit Trust.

In the third tranche, United Spirits will make a preferential allotment to Diageo, giving the British liquor giant 25% stake.
A Diageo spokesperson told DNA Money that the company would not like to comment further than the joint statement it issued last week along with United Spirits.

The deal would provide Mallya-led UB Group the much needed funds to prevent its airline business from staying grounded for long.

Kingfisher Airlines, which has accumulated losses of over Rs8,000 crore and total debt of Rs7,400 crore, has been struggling to pay salaries to its employees and has announced total shutdown till October 4.

Incidentally, Kingfisher CEO Sanjay Aggarwal has stated that the airline may resume operations from October 5, the day after the transaction is likely to be announced.

The transaction would also be a relief for UB Holdings as it has significant financial exposure on various counts to associate Kingfisher Airlines, with certain corporate guarantees invoked. As at June 30, its exposure included an equity investment of Rs2,114.28 crore, corporate guarantees to banks/aircraft lessors of Rs8,919.86 crore, loans and advances of Rs1,814.14 crore and other receivables of Rs165.62 crore.

Experts believe United Spirits will gain the most from this deal.
“Such a transaction, if implemented, would recede the stock overhang on account of group-related concerns, in our view. It will likely help increase focus on premiumisation, rationalise expenditure and exploit synergies between the two companies, leading to better profitability and support re-rating,” Latika Chopra, analyst at JP Morgan India, said in a note dated September 25.

As on June 30, United Spirits had a consolidated net debt of Rs80,634 crore, which has been putting huge interest burden on the company. Last fiscal, its interest expense amounted to Rs875.7 crore, or nearly 62% of its operating income.

The funds infused by Diageo may help to deleverage the balance sheet. Diageo, on its part, would gain a stronger foothold in Indian market after this deal.

“We are looking at expanding our footprint in emerging markets in Asia Pacific. We are looking at targets in emerging markets across China, India and Southeast Asia,” Gilbert Ghostine, president (Asia Pacific) at Diageo, said in Singapore on Tuesday, according to Bloomberg.

The British company is looking to generate 20% of its revenues from the Asia Pacific region by 2015, up from 14% now.