Diageo gain 53.4% stake in USL

Diageo is to acquire a 53.4% stake in Indian liquor baron Vijay Mallya's United Spirits for more than $2bn.

Diageo has agreed that it will acquire a 27.4% stake in USL, the leading spirits company in India. The consideration will be INR 1440 per share and the total consideration would be INR 57,254m (approx £660m). Following completion of these agreements, Vijay Mallya will continue in his role as chairman of USL, and United Breweries Holdings (UBHL) and will work with Diageo to build the USL business as consumer trends for premiumisation accelerate in India.

The agreements are in two parts:

• An agreement to acquire a 19.3% interest in the current share capital of USL at a price of INR 1440 per share from the UBHL group, the USL Benefit Trust, Palmer Investment Group and UB Sports Management (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees). Following this disposal, the UBHL group would continue to have a shareholding in USL amounting to 14.9% of current share capital.

• The shareholders of USL will be asked to approve the preferential allotment to Diageo at a price of INR 1440 per share of new shares amounting to 10% of the post-issue enlarged share capital of USL.

These agreements trigger an obligation on Diageo to launch a Mandatory Tender Offer to the public shareholders of USL. Diageo has therefore also announced that it will launch a tender offer to acquire, at a price of INR 1440 per share, a maximum of 37,785,214 shares, which equates to 26% of the enlarged share capital of USL.

On completion of the share purchases as described above and in the event that the tender offer were fully subscribed, Diageo will hold 53.4% of the enlarged USL share capital at an aggregate cost of INR 111,665m (approximately £1,285m). This represents a 20 x multiple of USL’s EBITDA for the year ended 31 March 2012 and the transaction would be EPS accretive in year two and economic profit positive in year six assuming a 12% WACC.

Diageo and Dr Mallya have entered into a memorandum of understanding under which they will form a 50:50 joint venture, which will own United National Breweries’ traditional sorghum beer business in South Africa. Diageo’s investment for its 50% interest in the joint venture is expected to be approximately US$36m (approx. £25m), subject to adjustment. Diageo and Dr Mallya are also considering the possibility of extending this joint venture in order to maximise opportunities which exist in certain emerging markets in Africa and Asia (excluding India).

Paul Walsh, Diageo CEO, states: "I am delighted at the opportunity Diageo has to be part of India's large and growing local spirits market. As a result of the agreements we are announcing today we will be well positioned to take the growth opportunities presented by a spirits market where growth is driven by the increasing number of middle class consumers. USL’s number one position in local spirits together with our growing international spirits business of leading brands will enable us to grow across the consumer space as India’s increasing number of middle class consumers look to enjoy premium and prestige local spirits brands as income levels rise. The combination of USL’s strong business with the capabilities ,which Diageo brings as the world’s leading premium drinks company will ensure that USL continues to lead the industry in India.

“Vijay Mallya’s experience in building USL to the leadership position it has is unique in our industry and in his position, as Chairman of USL, I look forward to working with him to deliver value for the shareholders of both USL and Diageo.

“The acquisition of our shareholding in USL is fully aligned with our strategy to build our presence in the world’s faster growing markets and enhances our position as the world’s leading premium drinks company.”

Dr Vijay Mallya, chairman of the UB Group, states: “I am very proud of USL and what has been created over the last 30 years to bring this company to its pre-eminent position in India. I have had a long association with Diageo and therefore I am confident that this winning partnership with Diageo provides USL with the best possible platform for future growth. I am delighted to remain part of that journey as Chairman of USL as we work together to build continued value for the shareholders of USL and UBHL.”

The key points of the agreements between Diageo, UBHL and USL are:

• Completion of the acquisition of shares from the UBHL group, the USL Benefit Trust, Palmer Investment Group Limited and UB Sports Management (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees) is subject to a number of conditions. These conditions include the release of all security interests over the USL shares to be acquired by Diageo. They also include the receipt of mandatory regulatory approvals (including competition approvals) in India and elsewhere.

• Diageo has reached agreement with USL under which the shareholders of USL will be asked to approve (by special resolution) the preferential allotment of new shares to Diageo, at a price of INR 1440 per share. The price is subject to applicable pricing rules under Indian regulations. These new shares will amount to 10% of USL’s post-allotment enlarged share capital. UBHL will vote in favour of the resolution. The preferential allotment is subject to certain conditions including USL shareholder approval and if successful, combined with the above acquisition of shares, would result in Diageo owning 27.4% of the enlarged share
capital of USL.

• The preferential allotment and the acquisition of shares from the USL subsidiaries will enhance USL's financial strength, including a reduction in USL’s net debt.
• Total consideration for the aggregate shareholding, representing 27.4% of the enlarged USL share capital, acquired through the arrangements for the acquisition and the preferential

9 November 2012 - Felicity Murray