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Will a deal with Diageo usher in good times for Vijay Mallya?

Diageo Plc is in talks to acquire a stake in Vijay Mallya-promoted United Spirits. The confirmation came on Tuesday though both sides have been in talks for months now according to market buzz. The two parties held unsuccessful discussions earlier in 2008, but Diageo is hopeful of a deal this time as Mallya is more open to offers.
Here are some important aspects of the proposed deal
  1. United Spirits valuation may be at a premium: Globally liquor companies trade at 10-11 times the enterprise multiple - a ratio used to determine the value of a company. However, in an emerging market and for a company with over 50 per cent share in a regulated market, a substantial premium to global average is warranted. Abhijeet Kundu, vice president (research) at Antique Stock Broking told NDTV that United Spirits may see a 50-60 per cent premium to global average.
  2. Diageo may buy majority stake: Diageo is looking initially to buy a 15 per cent stake from Mr Mallya's UB Group, which owns about 28 per cent of United Spirits and a further 10 per cent from other shareholders, one banker familiar with the matter told Reuters on Tuesday. If Diageo acquires 25 per cent of United Spirits, it would have to launch a mandatory open offer for at least 26 per cent more of the company to bring its stake to 51 per cent.
  3. United Spirits may become debt free: USL had total gross debt of Rs 8,140 crore at the end of March. Diageo may offer Rs 1,200 to Rs 1,300 a share, valuing the 25 per cent stake at up to roughly $793 million, sources told Reuters. If the deal happens, it will be a big positive especially in terms of deleveraging, Mr Kundu said. The interest outgo has been impacting the performance of the company, he added.
  4. United Breweries may be next? Mr Mallya and Dutch giant Heineken each own 37.5 per cent of United Breweries. Heineken, like other beverage makers including Diageo, is keen to bolster its presence in fast-growing emerging markets to offset sluggish growth in mature markets and is close to a deal for full control of Singapore-listed Asia Pacific Breweries Ltd, the maker of Tiger beer.
  5. What happens to Kingfisher Airlines? Mr Mallya has been scrambling to raise funds for his ailing Kingfisher Airlines for nearly a year now. Kingfisher has about $1.4 billion of debt. While Kingfisher's lenders have been putting pressure on Mr Mallya to bring in capital, one analyst told Reuters he did not think any sale proceeds from a deal for a stake in United Spirits would be injected into Kingfisher.
    "This has nothing to do with Kingfisher Airlines," said Sharan Lillaney, an analyst at Angel Broking who tracks both United Spirits and Kingfisher Airlines. "This is solely for United Spirits. Why would he put good money after bad money? They are doing a stake sale basically to get United Spirits out of a high-debt position that it is currently in," he said.

    Earlier this month, India changed its rules to allow foreign airlines to own up to 49 per cent in Indian carriers, a move long sought by Kingfisher, although no airline has publicly expressed an interest in taking a stake in it.


(With inputs from Thomson Reuters)

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