Diageo aims to expand presence in India with stake in United

Mallya has been scrambling for nearly a year to raise funds for his ailing Kingfisher Airlines, prompting market speculation that he may need to offload stakes in United Spirits, India’s dominant spirits maker, or United Breweries, producer of his flagship Kingfisher beer.

Diageo, the world’s biggest spirits group, has long coveted an expanded presence in India. In 2008, the two sides held talks that collapsed, but sources close to the situation said Diageo is hopeful of a deal this time as Mallya is more open to offers.

The maker of Johnnie Walker whisky and Smirnoff vodka is looking initially to buy a 15 per cent stake from Mallya’s UB Group, which owns about 28 per cent of United Spirits, and a further 10 per cent from other shareholders, a source said.

That would dislodge Mallya as the largest shareholder in United Spirits.

“There is no certainty that these discussions will lead to a transaction,” United Spirits, the world’s number one spirits maker by volume, said in a statement to India’s stock exchanges.

Mallya declined to elaborate following United Spirits’ annual shareholders meeting yesterday in Bangalore.

If Diageo took control of United Spirits it would need to unload the Indian company’s Whyte & Mackay scotch whisky business to avoid anti-trust problems. Diageo is the world’s biggest scotch whisky maker with around a third of the market.

Analysts see a deal as positive for Diageo as India is the world’s largest whisky market and Diageo is the world’s No.1 Scotch whisky maker.

“Emerging market sales would jump to 45 per cent of Diageo sales from 40 per cent now, and Diageo would gain a sizeable footing in what one day should be the world’s largest Scotch market,” said analyst Pablo Zuanic at brokers Liberum Capital.

Mallya, whose high-profile struggle to keep Kingfisher aloft has dented his image as the self-described ‘King of Good Times’, would retain a minority stake after the deal, sources have said.

If Diageo acquired 25 per cent of United Spirits, it would have to launch a mandatory open offer for at least 26 per cent more of the company to bring its stake to 51 per cent.

“They have been holding talks since 2008, but this time the expectations are high that the deal will go through because Mallya is in a really tight spot,” said V. Srinivasan, analyst with Mumbai-based Angel Broking

United Spirits had total gross debt of 81.4 billion rupees ($1.52bn) at the end of March.