Diageo plc, United Spirits Limited and United Breweries (Holdings) Limited have announced agreements under which Diageo would acquire a 27.4% stake in USL, the leading spirits company in India, and the company behind Whyte & Mackay. The total consideration will be approximately £660 million. Following completion of these agreements, Dr Vijay Mallya will continue in his current role as Chairman of USL, and UBHL and Dr Mallya will work with Diageo to build the USL business as the current consumer trends for premiumisation accelerate in India.
The agreements are in two parts: An agreement to acquire a 19.3% interest in the current share capital of USL from the UBHL group, the USL Benefit Trust, Palmer Investment Group Limited and UB Sports Management (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees). Following this disposal, the UBHL group would continue to have a shareholding in USL amounting to 14.9%. The shareholders of USL will be asked to approve the preferential allotment to Diageo of new shares amounting to 10% of the post-issue enlarged share capital of USL.
These agreements trigger an obligation on Diageo to launch a Mandatory Tender Offer to the public shareholders of USL. On completion of the share purchases as described above and in the event that the tender offer were fully subscribed, Diageo will hold 53.4% of the enlarged USL share capital at an aggregate cost of approximately £1,285 million. This represents a 20x multiple of USL’s EBITDA for the year ended 31 March 2012.
Diageo and Dr Mallya have also entered into a memorandum of understanding under which they will form a 50:50 joint venture which will own United National Breweries’ traditional sorghum beer business in South Africa. Diageo’s investment for its 50% interest in the joint venture is expected to be approximately approximately £25 million.Diageo and Dr Mallya are also considering the possibility of extending this joint venture in order to maximise opportunities which exist in certain emerging markets in Africa and Asia (excluding India).
Paul Walsh, Chief Executive of Diageo, said, “I am delighted at the opportunity Diageo has to be part of India’s large and growing local spirits market. As a result of the agreements we are announcing today we will be well positioned to take the growth opportunities presented by a spirits market where growth is driven by the increasing number of middle class consumers. USL’s number 1 position in local spirits together with our growing international spirits business of leading brands will enable us to grow across the consumer space as India’s increasing number of middle class consumers look to enjoy premium and prestige local spirits brands as income levels rise. The combination of USL’s strong business with the capabilities which Diageo brings as the world’s leading premium drinks company will ensure that USL continues to lead the industry in India.
“Vijay Mallya’s experience in building USL to the leadership position it has is unique in our industry and in his position, as Chairman of USL, I look forward to working with him to deliver value for the shareholders of both USL and Diageo. ?The acquisition of our shareholding in USL is fully aligned with our strategy to build our presence in the world’s faster growing markets and enhances our position as the world’s leading premium drinks company.”
While Dr Vijay Mallya, Chairman of the UB Group, commented, “I am very proud of USL and what has been created over the last 30 years to bring this company to its pre-eminent position in India. I have had a long association with Diageo and therefore I am confident that this winning partnership with Diageo provides USL with the best possible platform for future growth. I am delighted to remain part of that journey as Chairman of USL as we work together to build continued value for the shareholders of USL and UBHL.”
Diageo will fund the acquisition through existing cash resources and debt. Diageo believes that its financial strength supports its current single A credit rating and will hold discussions with the rating agencies as a consequence of this announcement.
– In certain circumstances where the preferential allotment is not successful (including where it is not approved by the shareholders of USL), UBHL has agreed to sell additional shares ito ensure that Diageo has a minimum shareholding of 25.1%. In the event that Diageo does not acquire a majority interest it is likely that a minimum shareholding of 25.1%, together with the voting arrangements and other governance arrangements agreed with the UBHL group and its relationship with Dr Mallya as Chairman of USL, would enable Diageo to reflect the results of USL in its consolidated accounts.
– The tender offer will be governed by the applicable takeover regulations of India and is subject to certain conditions.