The king of good times, Vijay Mallya, while addressing the media in a conference call related to the big ticket Diageo-United Spirits deal (for details click here) said, “I have not sold my Family Silver I have only embellished it.”

The chief of the UB Group said the transaction will deleverage United Spirit Ltd’s (USL) balance sheet. He said that the money that would come in USL will be primarily used for debt reduction.

As of now, USL has a debt burden of Rs 8,300 crore in its books and the all-cash deal will bring in Rs 3,300 crore to USL, through a preferential allotment and treasury share sale to Diageo (more on that here).

According to an analyst from a domestic brokerage who did not wish to be named, “It is a very big positive because it will reduce the company’s debt levels significantly and its interest rate should also come down as Diageo is the backer. EBIDTA margin should also improve and working capital reduction should happen. It will also result into EPS growth – from its present multiple of 13/14x to 25x, and will have pricing power in the market. This will help in substantial upside in the stock price.”

As per the finer details of the transaction, the USL promoters, who will hold around 13.5 per cent (after preferential allotment to Diageo) in the company, will give away voting rights to Diageo to help it consolidate the business in case the European liquor giant fails to increase its stake to 53.4 per cent after the open offer.

Another interesting facet of the transaction is that if preferential allotment for 10 per cent stake is not successful (for instance it is not approved by the shareholders of USL), United Breweries (Holdings) Ltd (which owns bulk of the promoters stake in USL) has agreed to sell additional shares to Diageo at the same deal price of Rs 1,440 per share to ensure that Diageo has a minimum shareholding of 25.1 per cent.

These measures have been taken to ensure that Diageo is able to capture results of USL in its consolidated accounts even if the deal does not give it a majority interest in USL.

One of the key issues in sealing the deal would be Whyte & Mackay, which USL acquired in a bugle-bracket deal a few years ago to boost its global business but saw debt pile-up on its balance sheet.

Given Diageo's strong position in the scotch market, the acquisition of USL may see it face regulatory hurdles as Diageo would also get access to Whyte & Mackay, which may face scrutiny of European anti-trust authorities. Earlier, there were talks of USL separating Whyte & Mackay to see through the deal with Diageo.

Mallya said, “We will be filing with the regulatory authority for permission and as of now, Whyte and Mackay is part of the portfolio.”

Analysts are also figuring out how much of the money will actually go to Vijay Mallya as almost entire promoters stake in USL is pledged with financial institutions and also much of promoters stake is held through public listed firms.

Those tracking the company say shares were pledged in the range of Rs 600-700 per unit and since the transaction has taken place at Rs 1,440 per share, the lenders would be happy in revoking it and Mallya will receive some net cash out of this deal, though the quantum is not clear.

Mallya shied away from answering questions on whether the money raised from this transaction will be used for the survival of the debt-laden Kingfisher Airlines. “We are not aware of any deadline by our lenders on Kingfisher Airlines. We are working on restructuring and recapitalisation of the airlines,” said Mallya.

“I am doing what I am doing for the best interest of the shareholders and let’s not cross-contaminate and inter-relate on everything,” he added.

Besides United Spirits and Kingfisher Airlines, Mallya also counts beer maker United Breweries Ltd as a key group firm. It has partnership with Heineken for United Breweries Ltd.

(Edited by Prem Udayabhanu)

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