Diageo is in talks with United Spirits over a stake buyout

Diageo is in talks with United Spirits over a stake buyout

On Tuesday, Diageo confirmed it was in talks with United Spirits over buying a stake in the UB Group-owned Indian drinks firm. If the story seems familiar, that's because the two firms have been here before, in 2009, when Diageo eventually pulled the plug after it baulked at the asking price.

But this time, commentators and analysts have assured us, things are different.

“Diageo stands a better chance of securing a deal this time,” the Wall Street Journal said after the talks were announced.

United's 43% of the Indian spirits market is the major spur for the emerging-markets focused Diageo, the WSJ said, as is India's huge spirits market, which at 120m cases of domestically-made whiskey, is larger than the global Scotch whisky market of 90m cases.

However, an analyst at Shore Capital warned that Diageo might want it too much.

“The company has said they want to get 50% of their sales from emerging markets by 2015, so to an extent they are a hostage to that guidance,” said Phil Carrol, quoted in the Hindu Business Line.

There are other problems.

“Selling premium brands in India is not quite so straightforward,” the business website Moneycontrol.com said. “There is a 150% import tariff on spirits, which gives local drinks a big advantage. And, once inside the country, Diageo would have to negotiate India's murky spirits market in which each state sets its own rules.”

A key part of the deal, some commentators said, would be the gaining of access to United Spirits' distribution network. If that and other ducks aren't lined up, there's always the chance Diageo will pull the plug again.

“Diageo’s track record on acquisitions suggests they are cautious acquirers with a strong emphasis on shareholder value,” Martin Deboo, an analyst at Investec in London, said. “They won’t overpay and will happily walk away if the deal is deemed not attractive enough.”

Another analyst warned United Spirits to be prepared for the consequences if it lets Diageo into its bed. “They would only buy a business if they saw a route to long-term control of the business,” said Trevor Sterling, an analyst at Sanford Bernstein.

What is apparent is that UB Group chief Vijay Mallya needs the cash and may well be willing to part with the spirits arm of his business in order to save his failing airline Kingfisher. That, however, may be too late.

Yesterday, Mallya said he was in “early” negotiations with overseas airlines on selling a stake in Kingfisher, according to the Daily Telegraph.

“Suddenly, everything in the sprawling empire of Vijay Mallya seems to be up for sale,” the New York Times said.

It is too early to say what this means for the Diageo deal. But, if Mallya is seeking to offload his assets, then Diageo will be a willing partner.