Could Whyte & Mackay be a sticking point between Diageo and The UB Group?

Could Whyte & Mackay be a sticking point between Diageo and The UB Group?

As the speculation linking a tie-up between Diageo and the UB Group in India intensifies, it's clearly only a matter of time before a deal is sealed. The main sticking points at this stage of talks between the two will be - obviously – value, and - inevitably – what to do with Whyte & Mackay.

While most of the headlines will be made by the former, I'm more interested in what happens with the latter. You can be sure that Diageo won't be able to have any part to play in the future of the Glasgow-based company, which came under UB Group's tutelage in 2007. W&M's namesake blended Scotch brand will attract the attention of anti-trust authorities in several markets and, much as Diageo may be up for getting involved in the single malts of Dalmore and Jura, it would make more sense to keep W&M in one piece - something I've posited before - and get a junior partner in on the action.

When Campari lined up majority control of Lascelles deMercado & Co earlier this month, I praised the Italian firm for coming to the rescue of a brand that had been neglected in recent times. More pertinently, the deal also showed the rude health of the spirits companies in the division below Diageo, Pernod Ricard and - in volume terms, at least - United Spirits.

I'm not saying that Whyte & Mackay has been neglected, because it clearly hasn't. Indeed, the unit was making a loss prior to UB Group's takeover and is now in far ruder health.

But, times have changed since 2007 and that suggests a divestment of W&M could play into the hands of the likes of Campari, Bacardi and maybe, William Grant & Sons (although the latter's Grant's blended Scotch brand may rule them out of any race).

For a start, the 'big boys' are all running at the kind of capacity in blended Scotch to rule themselves out of making a move. Pernod would also struggle to get over anti-trust hurdles thanks to the likes of Ballantine's and Chivas. Diageo and UB... well, I shan't repeat myself.

Enter, then, the 'smaller' players.

Whereas GBP595m - or US$1.18bn as the exchange rate stood in 2007 - may have been beyond their financial reach then, you can be sure, in these recessionary times, W&M will have to be sold at quite a loss.

Sources close to the situation tell me that W&M today is worth in the region of GBP390m ($631.2m).

And, if the likes of Campari can stretch to $414.8m for Lascelles deMercado, only three years after splurging $575m on Wild Turkey, then short-term pain for a firm of similar size could well generate long-term gain further down the road.