Mallya confident Diageo will buy into United Spirits despite plunging profits

VIJAY Mallya, the Indian drinks tycoon, says he is confident that Diageo will go ahead with its acquisition of up to 14.9% of his United Spirits Group and that a preliminary transaction could be unveiled as early as next week.

Speaking in NewYork, where executives of the two groups have been locked in discussions, a spokesman for Mallya said the meeting went well and details will be shared in the second week of February.

Diageo, which markets brands such as JohnnieWalker, J&B Rare and Smirnoff vodka in India, is understood to want improved access to the Indian spirits market.

Mallya's United Spirits, India's largest drinks firm with a 40% share of the market, has seen its share price plummet 46% this year amid investor concerns of a lack of clarity over its financing of the Whyte & Mackay acquisition. Last month it reported a 65% fall in net profit for the three months to December, citing the high price of molasses.

India is the world's largest consumer of whisky, but Scottish producers control only a tiny fraction of the market, which is dominated by a spirit made from molasses that cannot be sold as whisky within the European Union.

United Spirits lays claim to a 55% share of India's spirits market, but analysts say Mallya is keen to take on a non-Indian partner as the sector expands.

After a spate of acquisitions overthepastthreeyears,including Whyte & Mackay, and his decision to open Kingfisher Airlines in 2005, they suggest Mallya is also eager to raise cash.

Mallya has already pledged 30 million of his own shares in United Spirits as collateral against loans for the company's 595m acquisition of Whyte & Mackay and has pledged to deleverage United Spirits completely within six months.

He told an Indian television news channel: "There is not the slightest risk that these shares will be sold or that banks will call upon these shares to realise their outstandings because the underlying company performance, and the assets that these companies have, are strong enough to repay all the loans when they come due."

So far Mallya has launched nine brands in India, including, The Dalmore, Isle of Jura and Whyte & Mackay blended Scotch.

A Diageo spokesman said: "There are discussions between Diageo and United Spirits but these discussions have not yet identified a structure which is acceptable to both parties. The discussions will continue but, as we have said previously, there is no certainty that they will result in a transaction between the two companies."

John Wakely, a former managing director of investment bank Lehman Brothers who has been analysing the drinks market for more than 20 years and is now a strategic consultant, said: "I feel that is a very complicated transaction because it is a minority position in acompany with very diverse interests and that Diageo will take upmost care. However attractive India is, Diageo is buying a minority position not a majority position."