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Diageo offers £1.13bn to increase USL stake

Diageo has launched a bid of £1.13 billion to increase its controlling stake in United Spirits Limited (USL), a deal which could see it own 55% of shares in the Indian company.

Diageo has pushed ahead with its majority acquisition of India’s United Spirits

If accepted, Diageo’s tender offer will see it acquire up to 37.8 million shares representing 26% of United Spirits’ share capital.

This acquisition would be in addition to Diageo’s 29% stake which was gained last year for £726.5 million through its Relay BV subsidiary, already making the group the largest shareholder in United Spirits, producer of the world’s number one whisky McDowell’s.

However, according to Diageo’s chief financial officer, Dierdre Mahlan, if accepted in full, this tender offer would give Diageo a “certainty of control”.

The maker of Johnnie Walker Scotch and Smirnoff vodka has offered 3,030 rupees per share for the stake in the Bangalore-based United Spirits, which is an 18% premium on the company’s closing price on 11 April.

Overall, the UK company, which is the world’s largest spirits producer, would have spent £1.85 billion on its total shares in United Spirits.

It has been looking to increase its foothold in the Indian spirits market for some time in an attempt to tap into the country’s rapidly emerging middle class.

The company bought its initial shares in United Spirits at the end of 2012, and has encountered a number of hurdles in gaining a controlling stake along the way.

In July Diageo completed the purchase of a further 15% share of the company, taking its total interest to 25%. This was supplemented by later private share acquisitions in the same year following almost 12 months of negotiationsl and vying for governmental and regulatory approval in both India and the UK.

Competition concerns

However, following this deal, the UK’s Office of Fair Trading (OFT) ruled that it raised competition concerns between Diageo’s Bell’s blended Scotch whisky, and United Spirits’ own-brand label Whyte & Mackay Scotch.

In order to mitigate these concerns, Diageo has offered to sell the whole of the Whyte & Mackay Business, maker of the flagship Whyte & Macakay Scotch brand.

Unconfirmed reports have cited SPI Group, Gruppo Campari, Lion Capital, and TPG Capital as potential bidders. All declined to comment.

Meanwhile, in December last year a regional court in India surprisingly annulled the deal outright over a petition launched by creditors of United Breweries Holdings, which sold its stake in United Spirits.

Both Diageo and Vijay Mallya, chairman of United Spirits, said they would challenge the ruling.

Diageo and Relay said they have obtained the “required competition approvals” for this latest tender offer.

Following the announcement of Diageo’s recent tender offer, shares in United Spirits, surged 11% to 2,844.90 rupees on the Bombay Stock Exchange.

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