Mallya keen on closing deal with Diageo this time around

Clear intent on both the majors' parts to align but speculation rife as to how the deal will be structured

Speculation abounds on how Vijay Mallya will structure a deal to offload a strategic stake in United Spirits (USL) to global spirits major Diageo, even as more possibilities emerge about this game-changer, cross-border transaction playing out over the next few weeks.

While there is a clear intent on both the majors’ parts to align moons, intense negotiations, factoring in myriad prospects, are taking place.

One outcome could be that Diageo acquires close to half of what Mallya holds in USL, around 28 per cent. With this, Mallya would be creating a structure similar to that in United Breweries, where he and the Dutch brewer, Heineken, hold a 37.5 per cent stake each.

It is understood that Mallya is looking to strike a deal at Rs 1,300 a share, with a 30 per cent premium on the past six-month average of Rs 900 a share. With the deal looking imminent, USL’s stock gained an impressive 8.8 per cent on Tuesday, to close at Rs 1,147.70 a share on BSE, taking its market capitalisation to a little over Rs 15,000 crore. The stock has gained a whopping 76 per cent in the past six months. Diageo would have to shell out Rs 4,000 crore, if it intends to capitalise on USL’s vast India network.(VIJAY MALLYA'S ASSETS)
The other outcome, that Diageo is understood to be pushing for, could be the gaining of control over USL, something Mallya is not in favour of.
It is to resolve this that a battery of investment bankers put their heads together.
A possible solution which emerged was that Mallya cede control of USL at this juncture, with the option of regaining it after a certain period of time. “This will enable Mallya to address the burning issue of ballooning debt at Kingfisher Airlines to a large extent,” an investment banker close to the deal told Business Standard.
In addition, Mallya could look to sell the rest of the treasury stock in USL, worth Rs 1,500 crore, in favour of Diageo, and then shed some of his stake, giving the latter a good holding in USL.
Amid the rumours swirling, Mallya sought to clarify he was engaged in talks with Diageo for a strategic deal, but there was no certainty of a transaction going through. “I cannot disclose anything more than this,” he told reporters here after addressing USL’s annual general meet today.
Mallya and Diageo will also have to work in close coordination with regulators in the European Union on Diageo getting an indirect control over Whyte & Mackay, a wholly-owned subsidiary of USL, which has significant scotch reserves and may lead to a monopolistic situation for Diageo, if the deal sails through.
Saving Kingfisher?
If the sale to Diageo fails, as it did in 2008, then Mallya will have little room to manoeuvre and address the issue of infusing equity into ailing-carrier Kingfisher Airlines. Though there are some monetisable assets of around Rs 2,000 crore in USL to address its leverage issues, Mallya may not be able to infuse equity into Kingfisher.
“It is pertinent that he leverages some of his personal holdings in the group companies — United Breweries, USL or in Mangalore Chemicals & Fertilizers. It is only with these proceeds he can infuse equity into Kingfisher,” an analyst said.
Kingfisher, which was until last year India’s No 2 airline by domestic market share, but is now the smallest among the six main airlines after grounding most of its fleet, has $1.4 billion of debt.
While Kingfisher’s lenders have been putting pressure on Mallya to bring in capital, one analyst said he did not think sale proceeds from a deal for a stake in USL would be injected into Kingfisher.
"This has nothing to do with Kingfisher Airlines," said Sharan Lillaney, an analyst at Angel Broking who tracks both USL and Kingfisher.
"This is solely for USL. Why would he put good money after bad money? They are doing a stake sale basically to get USL out of a high-debt position it is in," he said.
This month, India changed its rules to allow foreign airlines to own up to 49 per cent in Indian carriers, a move long sought by Kingfisher, though no airline has publicly expressed an interest in taking a stake in it.
Shares in Kingfisher, which has never turned a profit, were up 1.5 per cent today and up 35 per cent since the day before India announced the policy change.
But, they are still 96 per cent off their all-time high.
Mallya's other big company is United Breweries, the dominant beer maker in India.
Mallya and Dutch giant Heineken each own 37.5 per cent of United Breweries, and sources said in March that Mallya was considering selling part of his stake to Heineken, although no deal transpired.
Heineken, like other beverage makers, including Diageo, is keen to bolster its presence in fast-growing emerging markets to offset sluggish growth in mature markets and is close to a deal for full control of Singapore-listed Asia Pacific Breweries, the maker of Tiger beer.
http://www.business-standard.com/india/news/mallya-keenclosing-dealdiageo-this-time-around/487659/