More threat to Mallya's stake in United Spirits

Vijay Mallya has more reason to be worried. The Friday order of the high court here has dragged Diageo into his battle with creditors and also  thrown into jeopardy the liquor baron’s holdings in United Spirits Ltd (USL).

On Friday, the HC had ruled as void a part of the sale of shares of USL by Mallya’s United Breweries Holdings Ltd (UBHL) to Diageo, the world’s largest distiller.

The sale came when Mallya was trapped in a sea of debt, mainly as a result of the losses his now grounded carrier, Kingfisher Airlines, had been piling.

When Mallya had signed away control of USL to the British company, he had also agreed to be the custodian of its controlling rights in the company. Several clauses of the deal with Diageo indicate Mallya and his group companies will have to compensate for any loss of stake holdings from the requisite 25 per cent to Diageo.

According to the terms, UBHL had agreed to sell additional shares in USL to Diageo at Rs 1,440 a share, to ensure Diageo had a minimum shareholding of 25.1 per cent, should the proposed arrangement of transfer of shares not result in this. While Diageo and USL have both said they will move the Supreme Court against the HC’s order, Friday’s decision shaves off about seven per cent of Diageo’s current 26.47 per cent stake in the latter.

Analysts say the situation has drawn Diageo into a very complex legal battle, whose end is anybody’s guess, with Diageo’s stake falling below the minimum 25 per cent threshold not because of the preferential allotment at the time of the sale but UB Holdings’

own stake sale that has been annulled by the court.

“To reclaim the 25 per cent, Diageo might again utilise the term of the deal that said UB Holdings and Kingfisher Finvest will procure the balance for them,” says analyst Vivek Veda of Espirito Santo Securities.

“The other options available would be a second open offer by Diageo or an increase of their stake by the admissible five per cent every year – both of which will be much more expensive than the original price of purchase,” Veda says.

If UB Holdings indeed has to arrange for the remaining shares, Mallya will land himself in a difficult proposition. Of the 13.51 per cent Mallya and his group companies hold in USL, 13.24 per cent is pledged to various creditors. Besides, 6.98 per cent of the total holdings belong to UB Holdings, which has been prevented from entering into any transaction until five winding-up petitions against the company are sorted.

Should Mallya procure the additional shares from the open market, he will have to shell out a premium of about 80 per cent to the original deal value of Rs 1,440 a share. Shares of USL closed at Rs 2,670.55 apiece on Friday on the BSE exchange.

In any case, UB Holdings has agreed to vote its remaining shareholding in USL as directed by Diageo for a four-year period. “UBHL will also vote its USL shares to enable Diageo to ensure its nominees are appointed to the USL board,” Diageo had earlier said.

While Mallya remained a director on the board and chairman of the company, his right to stay on the board will fall through if his various group companies hold less than one per cent in USL.