Comment – Wehring's Way – Diageo & United Spirits: More Questions Than Answers
Of course, we all knew it was going to happen. Didn't we?
Since almost exactly four years ago, when United Spirits and Diageo confirmed that they were discussing a partnership in India, it was always inevitable. Wasn't it?
Even if it has taken four years.
On Friday, when Diageo announced its intention to take majority control of United Spirits (USL) in a deal worth just over US$2bn, we all nodded sagely and claimed we had seen it coming all along. Indeed, after wave upon wave of speculation, many of us would have been forgiven for heaving a sigh of relief, muttering “thank goodness for that” and then turning to the next M&A rumour.
But hold up just a moment, here. There are some questions that are still unanswered.
- How will Diageo cope with a division driven more by volumes, and less by a premiumisation strategy?
In all its markets, including the 'emerging' ones, Diageo is hell-bent on encouraging consumers to drink less, but drink better. USL, meanwhile, has been hell-bent on becoming the largest spirits company in the world, in volume terms alone: 122m nine-litre cases were sold by USL in India last year! In terms of drinking less, but drinking better, India is a lot nearer the start of the curve than the end.
- Is Diageo ready to handle the relationship Indian consumers have with alcohol?
Sweeping generalisation alert: Most Indian consumers drink alcohol in order to get drunk – not to look rich in front of their friends, nor to savour the taste or the moment. While there is no denying that Diageo is one of the leaders globally in promoting responsible drinking, the sheer size of the Indian market means it will have a job on its hands from day one.
- Can this deal really be about improving Diageo's Indian distribution footprint, first and foremost?
Diageo has been keen to highlight USL's “strong distribution network and point of sale coverage” as being a major plus.
India is a market bulging with opportunity: the emerging middle class has arrived and is growing exponentially by the day. But, this middle class is centred around the mega-cities of Mumbai, Bangalore, Delhi and Hyderabad. After all, people go where the work is, right? My question, then: Is it really that difficult to develop spirits distribution to cover these large cities? Not if you're a company the size of Diageo, surely.
- Does this mean a trade agreement between India and the European Union is nigh?
As things stand, wine and spirits imports into India are hit by a 150% duty charge when they hit the dock/tarmac. Trade talks between the EU and India have been going for quite some time now and, while I'm told the drinks duty issue has been resolved, nothing will be signed until all aspects of the wide-reaching negotiations are settled. That looks unlikely to happen this year, but now that its USL deal has been struck, Diageo could certainly do with pen touching paper soon.
- What role will Vijay Mallya play in USL?
56-year-old Dr Mallya is one of our industry's more colourful characters. He is the chairman of USL's parent company, the UB Group, and has been the main negotiator for USL with Diageo. He is – and I mean no offence to either side here – not your average kind of Diageo guy. I remember when both Mallya and Diageo's CEO, Paul Walsh, were keynote speakers at the World Whiskies Conference in Glasgow in 2006; halfway through Walsh's speech, Mallya arrived through a side door, entourage in tow hubbub a-go-go. Walsh struggled to contain his disapproval.
Also, Mallya makes great quote, something the Indian media regularly milks. While Mallya will remain as chairman of USL, will this become a nominal role once Diageo takes control? I've heard rumours that the UK-based firm will look to install its own CEO and CFO at some point in the near future.
- What does the future hold for Whyte & Mackay?
I was a little surprised that Diageo made no mention of the Scotch whisky business that USL bought back in 2007. I was even more surprised at Walsh's lack of interest in the division's future, when pressed on the matter in a conference call. “We are somewhat ambivalent (about W&M),” he said. “We will look to see how the regulators feel about this and make our decision accordingly.”
Maybe, from a market perspective, W&M is not a hurdle. But, I'm pretty sure that both the Office for Fair Trading and - possibly - the Competition Commission here in the UK would have a valid case for investigating Diageo's share of production of Scotch whisky, should it plan to keep W&M.
For my thoughts on a new owner for W&M, click here.
- Why did the deal happen now and not sooner?
Four years is a long time for a deal to come to fruition and, with USL maintaining that it has been in regular touch with Diageo throughout that time, the obvious question is, why now? The obvious answer to this question, at least, comes in the form of UB Group's Kingfisher Airlines division.
Or, so many spectators would have you believe. UB Group maintains that it will not use the funds from the deal to prop up the ailing airline. That's as maybe. One thing I do know, however, is that, three years ago, Dr Mallya was only looking to sell 15% of USL to Diageo for a lot of money.
The size of Diageo's pending stake suggests that last week's move was more of a 'need' than a 'want' for Dr Mallya.
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