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Comment - Wehring's Way - Diageo in No Hurry in India

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Reports today claiming that Diageo's public offer to up its stake in United Spirits (USL) is doomed to failure should be taken in some sort of context.

As the drinks giant lines up the two-part purchase of 27.4% of USL, it has triggered a mandatory tender offer to the unit's shareholders that could bet a further 26%. The offer, which runs from 10 April to 26 April, will be priced at the same level as the initial 27.4% buy – INR1,440 per share. This level was announced at the same time as the deal was confirmed, way back in November.

With USL's shares trading in Bombay at INR1,755 at the close today, many in the media have suggested that Diageo's public offer “is unlikely to succeed after it opted not to lift its offer price”. Indeed, it would appear that some of Diageo's own shareholders are uncomfortable at the prospect of the move failing to come good.

The important word to bear in mind, however, is “mandatory”. Diageo is launching the public offer because it has to, rather than because it wants to.

There is nothing stopping the UK-based firm from waiting for the dust to settle on its Indian foray, and then heading out to up its stake in the future. It would appear from USL's share performance since November, however, that investors believe Diageo does not have any patience.

Witness, then, the company's handling of ShuiJingFang in China. As it looked to gain a notable presence in the baijiu market, Diageo had to wait a very long time: Almost five years, in fact. And, even then, the firm trod cautiously, launching a mandatory tender offer at a very low price, to ensure local investors maintained a healthy interest in the white spirits producer.

While the Indian authorities may not be quite as sensitive as China's when it comes to foreign interest in its domestic companies, Diageo's own sensitivity, in this instance, will be linked to the absence of a free trade agreement between India and the European Union.

As the rate of duty stands at 150% for a bottle of international spirits, there really is no rush to get into India in a big way right now. And yet, getting a foothold for when the doors open and Scotch whisky is welcomed with open arms is vital.

And, that's exactly what Diageo has done.


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