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Diageo Plc has agreed to buy a majority stake in United Spirits Ltd, controlled by Vijay Mallya, for $2.1 billion, fuelling a push by the world's biggest spirits group into fast-growing markets.
Diageo, which first tried to buy United Spirits
The Johnnie Walker and Guinness owner has been focusing on emerging markets where a growing middle class is developing a taste for more expensive drinks. Diageo has also been in talks to buy leading tequila maker Jose Cuervo.
"This (India) will become Diageo's number two market after the United States and if you look at the projections on what's happening with the emerging middle class...it has the potential in the long term to become our largest market," said Diageo Chief Operating Officer Ivan Menezes.
Diageo said it would fund the acquisition with cash and debt and expected no damage to its single-A credit rating - or its ability to make further acquisitions.
It added that the deal, which values United Spirits at 20 times EBITDA, would increase earning per share from the second year.
"Clearly this is a business that can grow very fast and where profitability can double easily within four or five years, so...I don't think this is an expensive deal at all," said Ian Shackleton, analyst at Nomura International.
If the deal gets regulatory and shareholder approval, it will be the biggest inbound Indian M&A deal since British oil firm Cairn Energy Plc
The main regulation issue is around United Spirits' Whyte and Mackay whisky, which Diageo - the world's biggest scotch company - would likely have to sell. Diageo Chief Executive Paul Walsh said the takeover did not hinge on Whyte and Mackay.
Mallya, who styles himself as 'King of the Good Times,' played down any link between the United Spirits sale and problems at his Kingfisher airline
"We are working towards a comprehensive rehabilitation plan including recapitalisation of the airline. It would be unfortunate if you would try to link this transaction with the airline," he told reporters.
Shares in other Mallya companies rose after Reuters reported the Diageo deal earlier on Friday, citing an internal memo. Kingfisher was up 4.6 percent while United Breweries Holdings Ltd
United Spirits shares, which have nearly tripled this year on takeover hopes, were up 1.3 percent at 1,360.5 rupees.
"Some of the Mallya group companies have been in turbulence for some time. This is his final opportunity to revive the fortune of the group," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors Ltd in New Delhi.
The Centre for Asia Pacific Aviation has said a fully funded turnaround for Kingfisher would cost at least $1 billion.
Mallya will stay on as chairman of United Spirits while Diageo will name the top executive team. UBHL will keep 14.9 percent of the company.
Diageo will acquire 27.4 percent of United Spirits from its founders and a packet of new shares for 1,440 rupees - a premium of around 7 percent to Thursday's close.
Diageo will then launch a mandatory offer for another 26 percent on the open market. If it fails to buy outright control, UBHL would vote with Diageo on decisions for four years. UBHL has an option to sell its remaining shares to Diageo from the end of the first full year of control for seven years.
Diageo - which also owns Tanqueray gin, Baileys liquer and Smirnoff vodka - makes about 40 percent of sales in emerging markets and had aimed for 50 percent by 2015. CEO Walsh told a conference call that he would now reset that goal.
Diageo said it had also agreed to a request from Mallya to form a joint venture to run a sorghum beer business in South Africa which it said would help it build its presence in another market with a growing drinking class.
The deal is part of a new wave of consumer goods M&A in Asia-Pacific after Heineken's
Diageo was advised by JM Financial, Bank of America Merrill Lynch and UBS. UBHL and United Spirits were advised by Citigroup and Ambit Corporate Finance.