Balancing a grand booze deal

Balancing a grand booze deal

Diageo Plc’s grand plans to take a controlling stake in Vijay Mallya’s United Spirits Limited (USL) might not come a cropper that soon. But the hangover of the many migraines embedded in the acquisition saga and negotiating multiple judicial and financial labyrinths has drained both parties involved. The Karnataka High Court’s decision to annul Diageo’s acquisition of 6.98 per cent stake in USL, a subsidiary of United Breweries (through a stake buy held by UB Holdings), the Bangalore-based booze giant owned by Vijay Mallya, is being fought with zeal by Diageo in the Supreme Court.

A quick conclusion on creditor activism and how it will impact the fate of the deal in court may still be elusive. Much of the controversy surrounding the United Spirits deal has to do with past perceptions involving Mallya’s bids to variegate his business exploits to match his multi-faceted persona. Few companies have tried to mix a heady brew the way the UB Group has attempted – blending the thrills of the Formula One racetrack with the frothy challenges of conquering the world beer market and keeping afloat hopes of reviving what was once India’s second biggest airline much after it succumbed to the challenges of surviving in a fiercely competitive aviation market. While, at the same time, making strategic acquisitions in the liquor market to widen UB’s portfolio of whiskies and making it more accessible in an Indian market largely groomed on beer – ironically, a druthers which UB played no small role in moulding.

However, the flurry of activity has come with its share of bloating and pain worth approximately $1.8-$1.9 billion in debt. The group’s multifarious forays across the spectrum of business ventures have led to its finances getting on the wild side, and the Karnataka High Court has mirrored popular disgust with Mallya’s aviation venture Kingfisher Airlines while censuring the company in its 173-page judgment of December 20 last year. What else explains the court’s indepth elaboration on the allegations made by the BNP Paribas-led creditor group that Rs 4,000 crore was “diverted” through a UB subsidiary in the British Virgin Islands and a bank guarantee for $135 million arranged for Mallya’s Formula One racing team by Diageo Holdings Netherlands BV through a Diageo Plc affiliate company?

While the court’s observations may not be directly related to the targeted stake sale of 53.4 per cent in United Spirits Ltd to Diageo or the winding-up petitions for holding company United Breweries Holdings Ltd filed by the creditors, it does reflect the fact that these “hangovers” can impact the deal going forward. Or, maybe, even advance an out-of-court settlement as Mallya is hoping for in the event of the Supreme Court verdict on UB’s review petition turning out to be as scathing as that of the Karnataka High Court.
History of odds

Both Mallya and Diageo have had their share of problems while carrying out strategic acquisitions regardless of the white or black knight armour they got into. More so with Mallya, but his dogged perstence and astute creditor management skills have prevailed -- outlasting his every bit fabled pony-tail.

However, the same persistence has also led to wishful thinking and a glossing over of serious operational (and consequently, people) issues under the carpet of business process as with Kingfisher. Good times need cash to rally on. Mallya’s longdrawn crusade to take over the operations of key rival Shaw Wallace, first in black knight attire and then as a white knight, was gruelling to the extreme – the Chhabrias wanted debt infusion while not totally ceding control. Mallya’s endurance prevailed and the deal happened, bringing in labels like Royal Challenge, a premium whisky, Director's Special and Antiquity, a super premium whisky, into the UB stable.

Conversely, Diageo’s plan to exploit the UB Group’s travails by taking control of United Spirits could move further and faster, as Mallya has reconciled any hopes of a Heineken-style deal with the British liquor major. This could trigger enough cash infusion from Diageo to service the UB Group’s spiralling debt. UB’s creditors have so far not sold USL shares in the market wholesale, since this could complicate the deal further. However, their patience has clearly run thin. The market has been hopeful of the deal going through, even brushing aside the Karnataka High Court’s verdict, but the question is whether a further spike in share prices running on investor optimism will help Diageo’s plans to raise its stakeholdings in United Spirits any easier. 

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