British multinational Diageo has purchased a 27.4% stake in United Spirits (USL). USL is part of the Bangalore-based United Breweries Group, which markets beer under the Kingfisher brand and launched the now struggling Kingfisher Airlines.
Vijay Mallya, the promoter of United Spirits and Kingfisher Airlines, says the Diageo-United Spirits deal is unconnected to the airline’s woes. “We have multiple businesses and each business operates independent of each other,” Mallya told reporters in India. “There is no cross-contamination.” He added that he had done what was best for his spirits business and would address the needs of Kingfisher Airlines, but that this would be a separate exercise.
Diageo agreed to acquire a maximum of 37,785,214 shares (19.3%) of USL for ₹1,440 (US$26) per share from United Breweries Holdings (UBHL), the USL Benefit Trust, two subsidiaries of USL – Palmer Investment Group and UB Sports Management – and SWEW Benefit Company, a company set up to benefit certain USL employees. UBHL will continue to hold a 14.9% stake in USL and USL’s shareholders will be asked to approve a preferential allotment to Diageo of new shares amounting to 10% of the post-issue enlarged share capital of USL.
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Under these agreements, Diageo is obliged to launch a mandatory public offer to USL’s public shareholders. If the tender offer is fully subscribed, Diageo will hold 53.4% of USL’s share capital at an aggregate cost of ₹111.7 billion (US$2 billion).
Amarchand Mangaldas advised United Breweries Group, including UBHL and United Spirits, on the deal. The firm was led by Mumbai-based managing partner Cyril Shroff and Bangalore-based partner Nivedita Rao. Partner Nisha Kaur Uberoi provided competition law advice, while senior adviser Nanda Shah advised on competition and tax matters.
Citigroup acted as the lead financial adviser to UBHL and USL, while Ambit Corporate Finance advised UBHL on tax and structuring issues. Kanga & Co advised the Indian companies on due diligence and Herbert Smith Freehills advised on English law matters.
JM Financial, Bank of America Merrill Lynch and UBS were the financial advisers to Diageo. Slaughter and May and Platinum Partners were the company’s legal advisers and Deloitte provided financial and tax due diligence services.
Speaking to India Business Law Journal about the deal, Saroj Datta, a former executive director at Jet Airways, said that it would be tough to predict how Mallya would rescue Kingfisher. “I believe that United Spirits has provided a lot of financial support to Kingfisher and that Dr Vijay Mallya has also given several personal guarantees,” said Datta.
“Vijay Mallya should not be permitted to once again short-change the shareholders of United Spirits,” said Datta. “He should be required to use his own funds, including his share of the amount derived from the sale of United Spirits, to meet the sums required to revive Kingfisher Airlines.”
Noting that he lacked full information, Datta expressed doubts about the extent to which Mallya’s funds could save his airline operations. “Possibly the amount will not be enough to repay even the employees and the airport and lessor dues, let alone all the debt obligations of the airline.”
Kingfisher Airlines, which has been operating since 2005, was, until recently, India’s third-largest airline. It has been desperately seeking financial stability after suffering a series of losses and accumulating over US$1.5 billion in debt. India’s Directorate General of Civil Aviation could revoke the airline’s operations licence if it is unable to come up with a convincing revival plan for its business.
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