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Diageo Offers $1.9 Billion to Gain United Spirits Majority

Published on Apr 15 2014 8:21 AM in Drinks

Diageo Offers $1.9 Billion to Gain United Spirits Majority

Diageo Plc (DGE) offered to pay 114 billion rupees ($1.9 billion) to gain control of India’s United Spirits Ltd., to extend its reach in the world’s largest whiskey market. United surged to a record in Mumbai trading.

The London-based maker of Guinness stout, Johnnie Walker scotch and Smirnoff vodka offered to buy up to a 26% stake for 3,030 rupees a share, lifting its shareholding to as much as 55%, Diageo said in an e-mailed statement today. 

The purchase “shows the kind of confidence Diageo has in the business model of United Spirits,” Gaurang Shah, assistant vice president at Geojit BNP Paribas Financial Services Ltd., said on Bloomberg TV India today. “With the balance sheet strength that Diageo has, it’s only going to be a one-way growth for the company.”

Diageo, the world’s biggest distiller, is expanding in emerging markets where economic growth is creating a broader middle class with more disposable income. The acquisition of Bangalore, India-based United Spirits is the country’s largest consumer products deal in a year and comes as rival Pernod Ricard SA seeks to extend its reach in developing economies.

United Spirits surged 11% to 2,846.9 rupees as of 10:50 a.m. in Mumbai trading, the highest level since its 2001 listing. The shares have gained 9% this year, while the BSE India Sensitive Index, or Sensex, gained 6%. Diageo rose 2.4% to 1,917 pence yesterday in London.

The offer is 18% more than United Spirits’ closing price on April 11. The tendering period is set to start on June 11, the company said.

Relative Value

“The premium is decent, but it may not get an overwhelming response from the shareholders,” said Ambareesh Baliga, managing partner of global wealth management with Edelweiss Financial Services Ltd. in Mumbai. “Lenders who hold shares pledged by United Spirits’ (UNSP) founders may offer their stock.”

Today’s deal values the target at about 39 times earnings before interest, taxes, depreciation and amortization in the past 12 months, according to data compiled by Bloomberg. That’s more than double the 16 times multiple for 16 takeovers in the same industry over the past five years, the data show.

Diageo has cash and near cash items of £1.77 billion, according to data compiled by Bloomberg.

Cementing Control

The beverage maker has no plan to take United Spirits private and the offer today will give it “certainty of control,” Diageo Chief Financial Officer Deirdre Mahlan said in a telephone interview today. The deal will be funded by commercial paper and longer-term debt, she said.

Indian-born Diageo Chief Executive Officer Ivan Menezes took over last year from Paul Walsh, whom he worked with to help engineer a deal to buy a stake in United Spirits, as the company seeks to gain 50% of its sales from so-called fast-growth emerging markets as European sales wane.

Diageo agreed last year to buy a controlling stake in Indian entrepreneur Vijay Mallya’s United Spirits.

Diageo had faced risks completing the purchase of Indian tycoon Mallya’s shares, which were offered, along with other assets, as collateral for his money-losing Kingfisher Airlines Ltd.

Diageo fell short of gaining a controlling stake in United Spirits last year after a mandatory open bid for shares at a price of 1,440 rupees a share drew little interest. The price was the same as accepted by Mallya, who has been seeking to cut Kingfisher’s debt after five years of losses.

As well as Johnnie Walker, the world’s biggest whisky brand, Diageo also sells malt whiskies including Caol Ila and Talisker and blended brands such as Buchanans and J&B.

Whyte & Mackay

Diageo in November said it offered to sell most of United’s Whyte & Mackay business to assuage concerns by the U.K. Office of Fair Trading that the acquisition could potentially lead to higher prices in the U.K. for blended whiskey. The sale is being managed by United Spirits and that process is underway, Mahlan said today, without giving further details.

United Spirits bought Whyte & Mackay, the maker of Scotch whisky including Jura and The Dalmore, for £595 million ($995 million) in 2007.

Diageo narrowed the bidders for its Whyte & Mackay spirits business to suitors including Lion Capital LLP, KKR & Co. LP (KKR), Thai Beverage PCL, Davide Campari-Milano SpA (CPR) and a Russian company, according to people familiar with the matter last month. The transaction may value the business at about £400 million ($668.6 million), the people said. The final round of offers is expected by April 17, they said.

Bloomberg

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