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Comment: Diageo deal offers hope for other Scotch whisky makers

Terry Murden

Terry Murden

  • by TERRY MURDEN
 

PAUL Walsh proved the benefits of playing the waiting game when the Diageo boss finally added a barrel-load of the Indian market to his drinks cabinet.

After years of consolidation, the opportunities for transformational deals in the sector have all but dried up, and Walsh’s pounce on Vijay Mallya’s United Spirits on Friday has been a long time coming.

While the Indian billionaire enjoyed the reputation of being the subcontinent’s Richard Branson, it looked as though he could keep the world’s biggest drinks company at bay and frustrate Walsh’s ambition to crack the country’s growing thirst for premium drinks.

But Mallya came unstuck when his Kingfisher Airlines got into difficulty. Suddenly he needed the money, and the Johnnie Walker-to-Guinness group was ready to provide it.

One commentator, quoting the Guinness advertising slogan, noted that good things come to those who wait – and certainly Walsh’s patience has paid off. It has also got him a better deal. Instead of the minority holding that he first considered, reputed to 
be about 36 per cent, the 
£1.3 billion transaction will give him a 53.4 per cent controlling stake.

Even with the extra bargaining power, Walsh is said to have paid top dollar, at 20 times underlying earnings against an average of 17 in similar deals over the past decade.

However, this deal is hugely significant for Diageo in a market where the aspirational middle class will grow from 120 million to 600 million by 2025 and in which United Spirits has a 42 per cent market share against a mere 1 per cent currently held by Diageo.

It also has repercussions in Scotland. United Spirits owns Scotch whiskies Whyte & Mackay, Jura and Dalmore. There had been talk of a sale of Whyte & Mackay, though Walsh was playing this down on Friday. It is possible, however, that competition issues may arise.

There is some encouragement for the broader Scotch whisky sector, as the deal puts Diageo in a better bargaining position with the Indian government on matters such as alcohol duties, which currently discriminate against imported brands.

The news was certainly positive for Diageo shareholders, who enjoyed a slight lift on Friday. Analysts predict as much as 15 per cent upside.

£35bn will help cover up cracks

THESE may be the worst of times for savers, but Chancellor George Osborne has managed to top up the Treasury’s account with a cheeky shift of £35 billion of interest earned by the Bank of England on its £375bn quantitative easing, or bond-buying, programme.

Osborne insists that switching the money from the Bank’s balance sheet to the Treasury is good housekeeping, and he has a point. Leaving it untouched when there is debt to pay down will contribute to the government’s deficit-reduction programme.

Therein lies the key to this transaction. It will go some way to assist Osborne in meeting his self-imposed rules on public finances ahead of the Autumn Statement on 5 December, when he will need all the help he can get to massage a messy situation.

The markets would certainly respond positively to any moves that cut the deficit, even though the sum involved will make only a small dent in the overall debt.

Opponents claim the transfer is an example of smoke and mirrors, and the exercise may backfire if the Bank makes a loss when it eventually starts to sell off the gilts.

 

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