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With Deal For Control Of USL, Diageo Becomes Force In India

November 9, 2012

With this morning’s news that Diageo is taking up to a 53% stake in India’s United Spirits Limited for around $2 billion, Diageo is poised to vastly increase its influence in one key emerging market where archrival Pernod Ricard has long held a sizeable advantage.

Diageo’s long-expected play for control of USL will be achieved in two parts. First, Diageo will acquire a 27.4% stake in USL for around $1.1 billion (with 19% coming from affiliates of USL parent UBHL); under Indian law that transaction will trigger a mandatory tender offer to USL’s public shareholders for another 26% of the company. UBHL, led by chairman Vijay Mallya, will continue to hold 14.9% of USL following the Diageo acquisition, which is expected to close in 2013’s first quarter. Mallya will remain chairman of USL, with Diageo appointing a new CEO and CFO. Some analysts have suggested that regulators will force Diageo to divest USL’s Scotch whisky unit, Whyte & Mackay, but Diageo CEO Paul Walsh said today that that condition wouldn’t scuttle the deal.

“We will be well positioned (in) a spirits market where growth is driven by the increasing number of middle class consumers,” said Walsh in a statement. “USL’s number-one position in local spirits together with our growing international brands will enable us to (reach) India’s increasing number of middle class consumers as income levels rise.”

The leading spirits producer in India with a share of over 50%, USL had net sales of around $1.6 billion and profits after tax of $34 million in the 12 months through March. USL is the second-largest spirits company worldwide by volume, after Diageo, according to Impact Databank. Volume rose 9% to 121 million cases last year, and has nearly doubled since 2006.

The deal represents a major strategic play for Diageo in a fast-growing market where Pernod Ricard—with its Royal Stag, Imperial Blue and Blenders Pride Indian whiskies—has long had the better of its top global rival. With Diageo now gaining a share in USL’s dominant local spirits business—and, perhaps more importantly, a formidable distribution network from which to build its global brands like Smirnoff and Johnnie Walker—competition between it and Pernod in India’s spirits market is about to heat up.

Meanwhile, Diageo has announced three changes to its executive committee. Andrew Morgan, formerly president of Diageo Europe, has been named to the new role of president of New Businesses, overseeing acquisition activity. Former Diageo Europe COO John Kennedy will become president of Diageo Western Europe. Finally, Diageo Africa president Nick Blazquez will become president of Africa, Russia, Eastern Europe and Turkey.

 

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