Diageo makes fresh open offer to buy majority stake in United Spirits for up to $1.9B

Diageo Plc, the world’s-largest spirits maker by revenue, has made its second open offer to try and buy majority stake in United Spirits, which could cost it as much as Rs 11,489 crore ($1.9 billion), as per a stock market disclosure.

VCCircle had first reported in November 2013 that Diageo is likely to come with another open offer and could offer Rs 2,900-3,200 per share.

Diageo has made the new open offer at Rs 3,030 a share.

United Spirits scrip shot up over 10 per cent in early morning trades and was quoting at Rs 2,835.55 a share at 10.15 AM on the BSE in a weak Mumbai market on Tuesday.

This is the second attempt by the liquor major to get a bigger say in the affairs of United Spirits, the 

world’s-largest spirits maker by volume. Its previous open offer triggered by the deal with UB Group to buy a strategic stake through a mix of stake purchase and preferential allotment did not find many takers.

In 2012, it had signed a deal to acquire up to 53.4 per cent of United Spirits, in a multi-tiered transaction worth as much as $2.1 billion. Around 27.4 per cent stake was to be purchased through a mix of preferential allotment and stake purchase from UB Group while the rest was proposed to be acquired through an open offer.

Diageo had offered Rs 1,440 a share in the tender offer a year ago and could garner a mere 0.04 per cent in the open offer as the share price had climbed much higher compared with what Diageo had offered.

This had taken its holding to just 25.02 per cent of United Spirits, less than half of its original plan after its open offer failed and the quantum of shares bought from Vijay Mallya’s UB Group and out of the treasury stock of the firm was less than what it had envisaged. It shelled out around $880 million for buying this stake.

Diageo had earlier refused to revise the open offer price for United Spirits even as the sharp run-up in the share price meant that the previous open offer was set to fail.

But it had been buying small lots in the open market to boost its holding. Last November it bought 1.96 million shares from the open market at Rs 2,400 per share valuing the transaction at Rs 472.31 crore ($75.5 million). Part of the stake was acquired through a bulk deal from Morgan Stanley Asia (Singapore) Pte, which sold off 3.9 million shares on the BSE. This has taken its holding to 26.3 per cent.

In January it hiked its stake in United Spirits again by acquiring 2.4 per cent more from a foreign portfolio investor for Rs 866 crore ($138 million), taking it’s holding to 28.7 per cent. The British firm has shelled out around $1.09 billion to buy 28.7 per cent of United Spirits to date.

The proposed 26 per cent additional stake would help it acquire as much as 54.78 per cent of the Indian firm. Given that full acceptance in a tender offer is rare, Diageo would hope to get at least 30.98 million shares of the 37.78 million shares it has offered to buy in the voluntary offer.

This would cost it around Rs 9,387 crore ($1.5 billion).

JM Financial and HSBC Securities are managing the open offer. JM Financial was the sole manager to the previous open offer.

Although Diageo could not manage to buy half of the Indian firm earlier, as envisaged, by virtue of being the single-largest shareholder and having presence in the board with its nominees, Diageo is in the driver’s seat. In the original agreement, it had ensured that if Diageo is unable to obtain majority shareholding, UB Holdings will vote as directed by Diageo for a four‐year period.

However, a bigger stake in the Indian firm could be crucial for a new development under which Diageo is looking to divest bulk of the business under Whyte & Mackay, a global spirits maker. As reported earlier, UK’s fair trade body has found that a combination of Diageo and Whyte & Mackay affects competition in sale of blended whiskey to retailers in UK.

Diageo has proposed to sell almost all of the business of Whyte & Mackay, which was acquired in a $1.2 billion deal by United Spirits a few years ago, which also ended up piling debt on the books of the company.

Diageo’s move would be critical for having a bigger say in the largest liquor maker in India, counted among the top emerging markets globally. Its deal with United Spirits was a big coup against its global competitor, Pernod Ricard, which is much bigger in India with brands like Royal Stag and Imperial.

(Edited by Joby Puthuparampil Johnson)

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