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USL-Diageo deal may get delayed

February 14, 2009 01:47 IST

The move by United Spirits, the Rs 3,500-crore flagship spirits firm of the UB Group, to rope in Diageo as a strategic partner is taking more time than expected. Diageo, a global leader in spirits, is reported to have said it was yet to figure out a structure under which they could forge a strategic relationship with USL.

USL has been actively involved in discussions with Diageo for nearly eight months now and early this month, the top brass of the UB Group, including its Chairman Vijay Mallya, had a fresh round of discussions with the Diageo management. "While there is no detailing on how the negotiations are going on, there are bound to be hiccups in a deal of such proportions," an analyst detailed.

Reacting to reports that the deal structuring may be delayed, Mallya said, "Both Diageo and United Spirits are public companies and cannot possibly be expected to comment on a potential transaction in definitive terms till negotiations are totally conclusive in all aspects. Therefore, it is correct that Diageo have stated that there is no certainty of a deal being concluded at this stage."

However, having said that, both Diageo and United Spirits would not invest the considerable time and money, together with advisors, to engage in negotiations if there was no intent to work towards a transaction, he added.

United Spirits initially had noted it was open to divesting close to 15 per cent stake and later added that they were open to divesting as much as close to 38 per cent. If United Spirits divests close to 15 per cent, it is expected to rake in Rs 1,200-1,500 crore. USL is looking to offload this 15 per cent stake through the treasury stock it holds. USL promoters hold close to 38 per cent. The USL stock climbed up 3.3 per cent on Friday and closed at Rs 688 on the National Stock Exchange.

Mallya also said that such large international transactions have to be carefully negotiated not only commercially but keeping international regulatory issues in mind so that there is total compliance and transparency.

"This is why Paul Walsh, CEO, Diageo, described this potential deal as being complicated. Diageo is the world's largest spirits company and United Spirits is the world's third largest, though operating in different segments of the spirits market. However, there are some overlapping areas of business, which may or may not attract anti-trust issues, which have to be carefully examined. All such issues have to be diligently dealt with," he added.

USL, India's leading spirits firm, is facing a debt burden of Rs 7,100 crore, having leveraged nearly three times, and is looking to first deleverage and then use Diageo's global presence to make inroads into the global spirits market. "The global market is pretty tough for USL to venture on its own and it needs this platform," the analyst detailed. In turn, Diageo will also be looking at USL's strong network of 2,500 dealers across the country to increase sales in the country's growing spirits market.

United Spirits in the recent past has been focussing heavily on promotion of its high-value brands and away from low-margin sales. "Diageo's premium brands gel well with this strategy," the analyst said. Diageo on Thursday said its net sales in India grew by 42 per cent while the volume grew by 18 per cent. The company, which sells legendary alcoholic beverages brands such as Johnnie Walker and Smirnoff, said that Smirnoff continued to grow with volumes up 4 per cent, driven by sales in India and Australia.

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