Diageo may buy into United Spirits

BANGALORE/MUMBAI: Global drinks leader Diageo is said to have evinced interest in picking up a minority stake in Vijay Mallya’s liquor flagship United Spirits (USL). Sources said talks exploring the possibility of Diageo buying around 10-13% in the Indian spirits behemoth, the world’s third-largest by volume, for $500-600 million have taken place.

Sources said Diageo was interested in buying into USL with the latter’s enterprise valuation pegged at over $5 billion. It is believed that the domestic giant may be open to placing a small stake with Diageo without ceding management control. This could see Diageo entering as a financial investor, for now, at least. In many ways, observers say, the move is reminiscent of Vodafone’s buy into Airtel some years back.

A source said a transaction could be in the offing by early next year, around February or March. Based on last Friday’s stock closing, USL’s mcap is estimated at Rs 18,281 crore ($4.5 billion). The counter closed marginally down at Rs 1,848. Sources say if Diageo’s efforts to gain a foothold in USL gains momentum, it could attract interest from other drinks giants as well.

UB Group denied any talks with Diageo for an equity transaction. “We keep talking to drinks industry leaders. But that does not mean we are looking for a deal.” a top group official said. Diageo India MD Asif Adil said he would not comment on speculation.

Incidentally, Mr Mallya and Diageo CEO Paul Walsh have developed a rapport in the past one year, with the former stepping up his drinks diplomacy, spending time jetsetting into meetings with global industry leaders. Recently, Mr Mallya told ET that he would wait for the fruits of recent M&As to mature before looking to de-leverage options or unlock value.

USL’s $1.18-billion acquisition of Whyte & Mackay this May was through a fully-leveraged deal. But the Indian liquor czar’s growing proximity with Diageo is evident in his talks to seal a $300-million bulk Scotch supply deal involving Whyte & Mackay.

Sources said talks with Diageo centered on the possibility of placing Shaw Wallace & Co’s 10.38% holding in United Spirits with the former. Earlier, the company sources had indicated the possibility of leveraging these shares for unlocking cash.

Following SWC’s impending merger with USL, the overlapping capital was supposed to be banked in a trust with each share quoting a reserve price. In context, the likelihood of USL placing the shares with Diageo is not being ruled out.