The much awaited transaction in which the world’s largest spirits maker Diageo would have picked up a minority stake in India’s biggest liquor maker United Spirits has been called off. The deal for which the two sides were negotiating for almost two years reportdely fell through over differences on valuation. Following the news of the talks falling through, the stock of USL fell as much as 4.8% this morning.
Initial reports which appeared in late 2007 said the deal could be worth $500-600 million for 10-13% stake in public listed United Spirits (USL). This would have valued USL at about $5 billion, while the company was at that time valued at $4.5 billion or Rs 18,281 crore in the bourses. But this was when stock market was reaching the peak of its five year bull run.
As per reports, Diageo had initially expressed interest in the company when share price was trading at Rs 1,800. Currently the shares are trading at Rs 924, almost half the price.
It is now expected that USL will go ahead with its private equity deal offloading around 10% and could also come up with a rights issue to raise resources. The company has treasury stock of around 8 million shares which could be used to sell stake to a financial/strategic investor. The fund raising is to retire huge debt of the firm which is around Rs 6,500 crore.
USL had already initiated talks with financial investors such as private equity firm KKR for raising funds. It was reportedly looking to sell around 10% to KKR while Diageo was to pick up a little less than 15%, the threshold level at which the acquirer has to make a mandatory open offer to acquire a further 20% in the company from public shareholders.
So it's likely that KKR deal goes ahead and USL may pursue the Diageo deal after it has cleaned up the balance sheet and improve valuations. KKR may also look to eventually sell out to Diageo few years down the line.
It is also probable that USL may negotiate with other international spirit makers such as Bacardi who had earlier expressed interest in USL, as have other private equity players.
Although the main reason why the deal hit a roadblock was valuation, it could have also faced problems in Europe with competition laws. This is because the deal would have left the possibility of Diageo picking majority stake in USL in the future and then owning Scottish distiller Whyte & Mackay (W&M). Even in India, Diageo would have got a strong foothold in terms of distribution.