Analysis - The End of Diageo's Hunt for United Spirits
Diageo finally has its Indian prize, in control of United Spirits
The UK-headquartered company confirmed earlier today (4 July) that the third and final part of its complex and convoluted agreement with USL's parent company, The UB Group, has been declared closed. Diageo now owns 25.02% of USL, making it the unit's biggest shareholder and - through pre-agreement with UB Group - giving it control of USL.
When the deal between UB and Diageo was agreed in November, the initial intention was that Diageo would buy 53.4% of USL. Suddenly, 25.02% looks rather paltry, doesn't it?
Stage one of the transaction completed at the end of May, when it bought an initial 10% stake for INR20.93bn. The second stage, which - confusingly, of course - closed two weeks prior to stage one, saw Diageo secure 0.4% of USL in a mandatory tender offer (MTO), which cost INR85.8m.
Recall, Diageo launched this MTO because it had to, and at the same price as agreed with UB in November; INR1,440 per share. Following the announcement last year, USL's share price leapt as investors jumped on board in the hope of pocketing something from Diageo further down the road – indeed, today, USL's share price stands at INR2,556.
Finally, today's transaction comprises a further 14.98%, bought from UB and various affiliates, for INR31.35bn.
Put down the calculator, I'll work it out for you: That's INR52.36bn (US$871.2m) all in.
So, what happens next?
Well, in the short- to medium-term, nothing. UB has seen its holding drop to 11.08% after today, and has committed to vote at Diageo's direction until either June 2018 or until Diageo owns over 50% of USL.
In the meantime, Diageo can acquire a maximum of 5% of the outstanding USL stock per year on the open market, without requiring regulatory consent or triggering another MTO. At the current share price, then, there really is no great urgency to do this.
And, what of UB's flamboyant chairman, Vijay Mallya? He is set to continue as chairman and non-executive director of USL, and Diageo said today that it will “explore the opportunity of extending the relationship (with Mallya) into other emerging markets in Africa and Asia … through a further joint venture relationship”. Of course, Diageo has already agreed a deal to run UB's sorghum beer business in South Africa as part of a JV.
Aside from that, with Diageo now laying claim to appointing its nominees to the roles of CEO, CFO and head of internal audit, Mallya's role within USL appears nominal.
Until 2018, at least.
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