Diageo eyes Indian markets as it reveals talks with Mallya

By DOMINIC JEFF
Published on 25/09/2012 20:31

JOHNNIE Walker owner Diageo is looking to grab a bigger share of the fast-growing Indian market with a possible £500 million bid for a stake in the country’s largest spirit-maker.

Scotland’s biggest distiller revealed yesterday that it had revived talks with Indian tycoon Vijay Mallya’s United Spirits, the owner of Glasgow-based Whyte & Mackay.

In a brief statement to the stock exchange, Diageo, which also owns the Bell’s and J&B whisky brands, said it was discussing “possible transactions” to acquire an interest in United.

Although not specified in the announcement, Diageo is thought to be seeking to buy a 15 per cent stake from Mallya and a further 10 per cent holding from other investors.

Any offer price would be likely to be in the region of 1,200 rupees (1,380p) to 1,300 rupees a share, valuing the 25 per cent stake at up to £500m.

Under Indian rules, Diageo would then have to make an open offer for a further 26 per cent of the company. That may suit Diageo boss Paul Walsh, who is said to prefer a controlling stake.

The firm, which also owns the Gleneagles Hotel, held similar talks with United in 2008 and 2009, but failed to reach an agreement. There have been persistent market rumours that the deal would be revived.

Diageo stressed that there is no certainty that the current discussions will lead to a transaction. However, its shares were higher yesterday as analysts said the deal would give it a better foothold in India, where the growing middle class has a taste for Scotch but import rules and duty make it hard for foreign firms to compete.

Mike van Dulken, head of research at Accendo Markets, said: “[This] would provide Diageo with an improved in-road into India, where an ever-growing and lucrative middle class is seen providing enhanced demand for high-end and aspirational consumer items, but where import duty on alcohol is very high and internal regulations provide major hurdles to outsiders.”

He said the move could provide a significant boost to Diageo’s Indian presence, where revenues grew by 24 per cent last year, making it the firm’s fastest growing market in the Asia Pacific region.

Mallya, owner of India’s first F1 team, is thought to be in need of cash after his Kingfisher Airlines ran into turbulence.

Until last year it was India’s second-largest airline by domestic market share but it has never turned a profit and is now the smallest of the country’s six main airlines after grounding most of its fleet as it struggled with a £900m debt pile.

While Kingfisher’s lenders have been putting pressure on Mallya to bring in capital, it is not clear if any sale proceeds from a deal for a stake in United Spirits would be injected into Kingfisher.

Mallya is also said to have considered selling part of his stake in Kingfisher beer maker United Breweries to co-owner Heineken, although no deal transpired.

Analysts in India said expectations of a deal with Diageo were high because of the pressure on Mallya.

If it acquired a controlling stake in United Spirits, Diageo may be forced to divest the Whyte & Mackay brand from the business to appease the competition watchdog.

The focus of any deal is instead thought to be United’s business in Asia, which ties in with Diageo’s target to generate half its sales from emerging markets, up from 39 per cent currently.

Shares in Diageo closed up 30p at 1,754p.