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Reuters Photo Credit: Vijay Mallya

Diageo looks to ring-fence its $3B investment in United Spirits

27 April, 2015

London-headquartered Diageo Plc, the world’s largest liquor producer by revenues, is set to swing into action to ring-fence its $3 billion investment in India.

The firm is looking at options to push out Vijay Mallya out of United Spirits board after the former promoter of United Spirits Ltd (USL) appeared defiant over calls to make him step down as chairman of India’s top liquor maker. Diageo’s moves- to be initiated soon- would also seek to get pending dues owed by UB Group firms to USL, sources said.

Diageo owns 54.78 per cent stake in USL, while Mallya owns 4.09 per cent stake, partly through public listed holding firm United Breweries (Holdings) Ltd. Over half of UB Group’s stake is pledged with financial institutions. However, UB Group is still counted as a co-promoter of the firm.

The development is related to an investigation probing irregularities over financial transactions involving USL and other UB Group firms, controlled by Mallya.

The probe covered the company’s financial dealings with various UB Group companies including a loan of Rs 1,300 crore to United Breweries Holdings, which may have been further lent to Kingfisher Airlines, a defunct aviation venture of UB Group.

USL was forced to make a provision of Rs 330 crore for FY14 on this eight-year loan.

The ongoing investigation also covers a loan of Rs 600 crore to various business associates of USL, including third-party bottlers.

Soon after completing a revised open offer to gain control of USL last July, Diageo had initiated a thorough investigation in the matter.

Diageo-controlled USL board engaged PwC UK to conduct a forensic audit into the various loans to UB Group during 2011-2012. The balance sheet for that year was signed by auditing firm Walker, Chandiok & Co. The previous year’s balance sheet was signed by PwC.

PwC UK in a statement to VCCircle said it was engaged in September 2014 to investigate, with the assistance of PwC India, a specific set of issues as part of an internal enquiry initiated by the USL board.

“This was completely separate, independent and carried out by people not involved in the historic statutory audits of USL performed by Price Waterhouse in India, the last of which was for the year ended March 31, 2011,” the PwC UK spokesperson said.

Diageo in a statement on Monday said that USL has provided its inquiry report and all related materials. “Diageo notes the recommendation of the USL board and will now consider its position under its agreement with Dr Mallya and United Breweries (Holdings) Limited in light of the inquiry report and materials provided to it,” Diageo said in a media statement.

It is understood that USL may appraise the Indian securities markets regulator – Securities and Exchange Board of India (SEBI) the alleged impropriety in the financial transactions between USL and UB Group.

However, analysts question the entire due diligence process conducted by Diageo when it sought to acquire management control of USL and then subsequently majority control of USL by forking out a good $3 billion, as part of its emerging markets push.

Diageo defended its diligence process said that it was aware of receivables owed from various third parties to USL. “We were given express representation that all of these receivable were recoverable in full,” a spokesperson for Diageo told VCCircle.

“As part of our due diligence of USL in 2012, we were made aware of the inter company balances between UBHL and USL and many of which were undocumented. Prior to completion of our investment on July 4, 2013, USL and UBHL formalised the arrangements relating to such inter company balances by formally documenting UBHL’s indebtedness in the form of existing UBHL inter company loan for an amount of Rs 1,375 crore at an interest rate of 9.5 per cent,” the Diageo spokesperson told VCCircle.

USL has so far written off a total of Rs 5,500 crore to take into account the sale of a Scottish subsidiary Whyte & Mackay, intra-group loans and value impairments and prior-period expenses. Industry watchers say UB Group’s ongoing financial troubles means USL is unlikely to see the money it lent any-time soon.

United Breweries (Holdings) had net loss of Rs 1,393.67 crore over revenues of Rs 736 crore for the year ended March 31, 2014.

Legal experts say there will be various clauses of recourse for an acquirer against a target despite disclosures. “As we understand, there were representations from UB Group that all the sum lent to various group companies are recoverable. Now given the fact that it may not be so, Diageo certainly has a recourse on this,” a senior corporate lawyer told VCCircle.

Mallya maintains that Diageo had four months of time for diligence and all the transactions were properly authorised by the then USL board and passed by the shareholders.

“It is, therefore, surprising that such prior period matter have become the basis for actions today,” Mallya said over the weekend.

Diageo-controlled USL board asked Mallya to vacate his board position but the Indian businessman is now exploring various options, including legal, to retain his seat.

Either ways Diageo and Mallya are headed for a legal battle.

Investors didn’t like the ugly turn of events and USL scrip last traded at Rs 3,298.20 a share, down 3.46 per cent on NSE in a weak Mumbai market on Monday.

Among other UB Group firms, United Breweries (Holdings) shares tripped 4.46 per cent while beer maker United Breweries Ltd crashed over 12 per cent. Heineken owns 39 per cent in United Breweries, the maker of Kingfisher brand of beer.

Mallya, once counted among the more colourful businessmen in India who led a glamorous life lording over a huge liquor empire, ran into troubles over an ambitious attempt to fly with now debt laden and defunct Kingfisher Airlines. His overseas acquisitions through USL with trophy assets such as Whyte & Mackay also later turned into a pain point over the debt taken to seal those deals.

He barely managed to see through a hostile bid by Deepak Fertilisers over an unrelated group firm Mangalore Chemicals & Fertilizers Ltd after bringing in Saroj Poddar as a white knight. He was classfied as a ‘wilful defaulter’ over Kingfisher Airlines’ loans which also forced him vacate the position as chairman of Mangalore Chemicals & Fertilizers. While he remains a co-promoter of the company, Poddar’s Adventz now has a dominant say in the firm.

The only key asset for UB Group is now its stake in United Breweries, currently worth around $1.5 billion.


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Diageo looks to ring-fence its $3B investment in United Spirits

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