INDIA – Diageo was considering raising its majority stake in Indian whisky producer United Spirits, people familiar with the matter said, as the British maker of Johnnie Walker scotch strengthens its hold on the Asian country’s growing liquor market.
Diageo is weighing an open offer to the other shareholders in India’s biggest spirits maker, according to the people, who asked not to be identified because the information is private.
Diageo has a 55% stake in United Spirits, which has a market value of about $4.7bn, according to data compiled by Bloomberg. No final decisions have been made and the company may decide against buying more shares, they said.
If completed, the deal would help Diageo build on its lead in the world’s largest whisky market by volume, while pushing its other brands such as Smirnoff vodka and Guinness beer sales through United Spirits’ established and vast distribution network.
Whisky consumption in India is on the rise, aided by an expanding middle class and young demographics.
The British company has been considering an increased stake for several months, the people said.
The decline in United Spirits shares, which have fallen 22% in the 12 months through Tuesday, had made such a move more attractive now, one of the people said.
United Spirits shares rose as much as 7.1% in Mumbai on Wednesday to the highest intraday level since November 2, after surging 6.5% a day earlier.
Diageo rose 1.2% on Wednesday in London, rebounding from two days of losses.
United Spirits is not aware of the “exact reasons” for recent stock moves and does not wish to comment on rumours, the company said in an exchange filing on Wednesday. Diageo declined to comment.
The decline in United Spirits shares, which have fallen 22% in the 12 months through Tuesday, had made such a move more attractive now, one of the people said
Under Indian stock market rules, Diageo could raise its stake to just under 75% without triggering a delisting offer.
The current value of a 20% stake in United Spirits is about $940m.
“The strategic rationale for such a transaction seems compelling, and we believe the timing would make sense,” Morgan Stanley analysts led by Olivier Nicolai wrote in a note on Tuesday, citing United Spirits’ recent share underperformance amid concerns including regulations and a pending goods and service tax in India.
Sales at the Indian company have stalled since growing 13.3% in the year ended March 2013, and are expected to rise just 3.9% in the year ended March 2017, according to the average of 20 analyst estimates compiled by Bloomberg.
India “is an important driver of growth” for Diageo and a key area of focus in the current fiscal year, the British distiller’s CEO, Ivan Menezes, said in July, when he reiterated the company’s medium-term goal for double-digit growth at United Spirits.
The UK distiller agreed to acquire a stake in United Spirits, the maker of McDowell’s No 1 whisky and Romanov vodka, in 2012. The company bought a further 26% stake through an open offer in 2014 to raise its holding to 54.8%.
Diageo “will have to show some solid results by acquiring further control at lower cost” after its stake acquisition in 2014, said Arun Kejriwal, founder of advisory firm Kejriwal Research & Investment Services.
A deal would appeal to Diageo, which “may be able to raise its market share in India by selling more of its brands through United Spirits”, Bloomberg Intelligence analyst Catherine Lim said.
Prospects for whisky consumption in India are attractive, projected to rise 3.6% on average from 2017 to 2020, compared with an average drop of 0.5% in China, she said.
The parent company had been at odds with United Spirits’ former chairman, Vijay Mallya, asking the Indian businessman to resign in 2015 after an internal investigation found that company funds were diverted to other entities under his control.
Mallya initially refused to quit, denying any wrongdoing. The two sides reached an agreement in 2016 that paid the executive $75m not to compete or interfere with the company for five years, and he resigned with immediate effect in February.