Diageo bids $1.9 billion to take majority in India's United Spirits

By Sumeet Chatterjee, Nandita Bose and Martinne Geller

MUMBAI/LONDON (Reuters) - Diageo, the world's biggest spirits maker, has launched a $1.9 billion (1.1 billion pounds) bid to nearly double its stake in United Spirits Ltd, offering a rich price in the hope that India's increasingly wealthy consumers will drink more alcohol.

If successful, Diageo would end up with 54.8 percent of India's largest spirits company, which was previously controlled by tycoon Vijay Mallya. He has shed assets under heavy debt and the collapse of his Kingfisher Airlines Ltd, but remains chairman of United Spirits.

The spirits market in India was worth 11.9 billion euros (9.8 billion pounds) in 2012, according to research firm IWSR, and is being driven by growth of premium and super-premium brands.

"Diageo is doing the right thing, given the very significant long-term upside for the Indian spirits market and the opportunity, we believe, to significantly raise (United Spirits') margins over time," said Citigroup analysts.

RICH DEAL

The maker of Johnnie Walker Scotch and Smirnoff vodka, which already has 28.8 percent of United Spirits and management control, on Tuesday offered to buy shares at 3,030 rupees (30.08 pounds), a premium of 18.5 percent to their last closing price, sending the stock up nearly 12 percent.

If fully subscribed, Diageo's offer would represent a multiple of 38 times United Spirits' EBITDA (earnings before interest, taxes, depreciation and amortisation) for the year ended March 2013, which is much higher than even the industry's most expensive deals.

Japan's Suntory agreed in January to pay over 20 times earnings for Beam Inc, which was close to the record 20.8 times that Pernod Ricard paid in 2008 for the maker of Absolut vodka. Analysts said earlier this month that Remy Cointreau could fetch up to 22 times earnings, due to its high-end portfolio of cognac.

"When you see a multiple like that, you draw your breath a little," said Trevor Stirling, an analyst at Bernstein Research. "But I'm inclined to give Diageo the benefit of the doubt," he said, since Diageo is not known to be profligate when it comes to acquisitions.

Indeed Diageo walked away from distributing Jose Cuervo tequila last year after failing to reach a deal for an equity stake with the brand's Mexican owners.

BETTING ON INDIA

India is a key battleground for global consumer goods firms, including spirits makers, who are increasingly looking to emerging markets to offset sluggish growth in Europe and North America.

Diageo generates about 42 percent of its revenue from emerging markets but aims to lift that figure. Aside from United Spirits, it has acquired businesses in Brazil, Turkey, China and Guatemala and last month reshaped its management team to give more focus on India and China.

Diageo said the investment in United Sprits would lift its earnings on a per-share basis in the year ending June 30, 2016.

Two-thirds of Indians do not drink alcohol at all, often for religious or cultural reasons, but rapid urbanisation, a young population and a fast-growing middle class are changing consumption habits.

Despite an Indian economy growing at its slowest in a decade, global companies have continued to invest in the long-term potential of consumer spending in the country. Last week, UK telecoms giant Vodafone Group Plc bought the remaining 11 percent in its Indian unit and Unilever increased its stake last year in its venture Hindustan Unilever.

Last year, Diageo bought its existing stake in United Spirits, settling with considerably less than it had sought after a 2012 tender offer failed when it opted not to lift its offer price despite a surge in United Sprits shares.

"We do think that it will be a successful transaction," Deirdre Mahlan, chief financial officer of Diageo, told Reuters on Tuesday about the latest bid. "We believe that it creates a unique opportunity for investors to be able to monetise their investments."

Diageo controls United Spirits through its holding and a shareholder agreement, and the tender offer is unlikely to result in any management changes, Mahlan said.

Diageo intends to keep United Spirits listed in India even if its offer is successful. The new offer will be launched in June, it said.

Mallya's UB Group owned 10.46 percent of United Spirits at the end of December. A spokesman for the group declined to comment.

JM Financial Ltd and HSBC Holdings are arranging the Diageo offer.

(Editing by Tony Munroe, Stephen Coates and Keiron Henderson)