Whisky giant Diageo buys controlling stake in Whyte & Mackay owner United Spirits

By MARTIN FLANAGAN
Published on 09/11/2012 20:09

SPIRITS giant Diageo is splashing out £1.3 billion for a majority stake in Indian liquor magnate Vijay Mallya’s United Spirits to intensify its focus on the country’s burgeoning middle class.

Paul Walsh, chief executive of Diageo, Scotland’s biggest Scotch whisky group, hailed the deal as “a significant milestone in our strategy to build our presence in the world’s fastest growing [spirits] markets”.

Walsh said India was a $6bn (£3.8bn) alcohol sector, predicted to grow at 15 per cent annually over the next five years. He said the “aspirational” middle class – a key Diageo target in emerging markets – was forecast to grow fivefold in India by 2025, from 120 million now to 600 million.

The company, whose products include whiskies Johnnie Walker and J&B, as well as Smirnoff vodka, said United’s 41 per cent Indian market share “will transform our footprint in India”.

It comes after the British group and Mallya, who also owns India’s lossmaking Kingfisher airline, revealed they were in talks again in September after talks had broken down in 2008.

Under the terms of yesterday’s deal, Diageo will pay an initial £660m for a 27.4 per cent stake in United. This will trigger a tender offer to public shareholders in the Indian group which, if fully subscribed, will give Diageo a controlling 53.4 per cent holding.

Mallya will retain his current role as chairman of United. In a separate deal, Diageo and Mallya have agreed to form a 50:50 joint venture which will own United National Breweries’ sorghum beer business in South Africa.

Diageo will pay about £25m for its share of the j/v, and the parties confirmed they were looking at extending the venture to “maximise opportunities” in emerging markets in Africa and Asia, excluding India.

Walsh played down the possibility of any enforced disposals in order to get the deal past Indian and other regulators, including Mallya’s ownership of the Whyte & Mackay Scotch business in Scotland.

“We need to look at it [Whyte & Mackay] closely. I don’t think it’s an automatic sale,” Walsh said. “The presence it has in emerging markets is disproportionate to its presence in non-emerging markets. I would not conclude it has to be sold.”

Regarding other possible brand sales arising from the deal, the Diageo boss said it was “very dangerous to speculate” and discussions would be held with regulators. But he added: “I would be surprised if our portfolio is impacted at all in that regard.”

Walsh denied that Diageo was paying top dollar with a price-earnings multiple of about 20 times for the acquisition.

“I don’t think for a business in such a vibrant market that is a particularly high multiple,” he said. He added that United was “not a synergy-driven transaction. This is a market‑entry‑at‑scale transaction with very exciting demographics”.

However, he said that Diageo expected to be able to use its marketing and innovation skills to improve profit margins at the “very well run” Indian company in the near-term.

Diageo employs more than 3,000 people in Scotland, where it has a 30 per cent Scotch market share.