Johnnie walks away with Mallya flagship

Vijay Mallya remained brazenly defiant, in denial, as the crown jewel of his empire got sold.

Diageo Plc, the world’s largest liquor company, on Friday agreed to buy a 53.4% stake in United Spirits for $2.1 billion (Rs 11,166 crore) in a two-legged deal.

Mallya preferred to call the transaction a win-win.

“I have not sold the family jewel, only embellished it. This deal is not a sellout, that is just India media’s perception and I can’t help that. Diageo wanted to consolidate its position in emerging markets. And this deal is just an appreciation of their needs and has been done in order to help them consolidate.”

Incredibly generous of Mallya as this may sound, the fact is the company his father founded is no longer his.

That’s because, even if Diageo, the owner of brands such as Johnnie Walker, J&B, Smirnoff, Baileys and Guinness, ends up with less than 50.1% stake after an open offer, UB Holdings will have to vote in favour of all resolutions proposed by Diageo for the next four years.

In other words, Diageo controls. By extension, Mallya becomes just a figurehead chairman.

“There will, of course, be non-compete clauses too that are standard to such deals, which will lock the flamboyant baron up from entering the business separately for years,” said an analyst.

Mallya, whose net worth was valued at Rs4,300 crore ($800 million) by Forbes magazine in October, will be worth a quarter less, or Rs3,000 crore after the transaction.

In the first leg of the deal, Diageo will acquire a 27.4% stake from the founders of United Spirits through UB Holdings, and will subscribe to 1.45 crore new shares being issued, valued at Rs2,090 crore at Rs1,440 apiece. That’s a premium of around 7% to the closing price of the share on Thursday.

This will bring in Rs5,725 crore, of which Rs 3,300 crore will go to United Spirits and Rs2,400 crore to UB Holdings.

United Spirits currently has a debt of Rs8,300 crore.

Diageo will then, in the second leg, launch a mandatory open offer for an additional 26% from public shareholders at the same price, giving it a majority 53.4% stake in United Spirits. UB Holdings will end up with 14.9% stake after the deal.

The agreement comes after months of haggling and will ramp up Diageo’s presence in the world’s largest whisky market.

The deal will also help Mallya gain much-needed cash to reduce the debt borne by United Spirits and free up funds to revive his grounded Kingfisher Airlines.

Some analysts, however, said that may not be enough. The Centre for Asia Pacific Aviation has said a fully funded turnaround for Kingfisher would cost at least $1 billion.

“At this moment, Kingfisher may be a difficult cause to revive. As other UB group companies are also quite over-leveraged, I think they will prioritise restructuring other group companies ahead of Kingfisher,” said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd in New Delhi.

(With Reuters inputs)