Diageo will ‘contest vigorously’ Mallya joint venture claim

United Spirits chairman Vijay Mallya has accused Diageo of failing to establish a new joint venture with him in the emerging markets, a claim the drinks giant said it will “contest vigorously”.

Vijay Mallya believes he has “significant financial benefits” owed to him from Diageo

In its latest interim financial report, Diageo disclosed that Mallya, chairman of its Indian drinks subsidiary United Spirits Limited (USL), believes he “has certain claims against Diageo arising out of a failure to conclude a joint venture with him in respect to certain emerging markets in Africa and Asia (excluding India) and to provide significant financial benefits to him”.

However, Diageo said only the “possibility” of such a deal was discussed at the time the group entered into its initial acquisition deal with USL in 2012.

This was discussed alongside a “non-binding memorandum of understanding” for the establishment of a joint venture to own United National Breweries’ (UNB) sorghum beer business in South Africa.

This particular deal was completed in June 2013 and in May 2015, Diageo acquired the remaining 50% of the joint venture, making UNB a wholly owned subsidiary within Diageo.

But Diageo said its 2012 announcement “noted that it was not certain whether the emerging markets venture would be established or, if so, on what basis”.

Diageo completed its initial USL stake acquisition in July 2013 and said once the “integration” of USL into its portfolio was “successfully underway” it would “explore the opportunity” of establishing a further joint venture partnership with Mallya in the emerging markets.

The group added that this announcement was also not binding.

Counter-indemnity claims

Diageo said Mallya made claims of his perceived entitlement as a “stand alone matter” and in response to Diageo Holdings Netherlands’ intention to “bring counter-indemnity claims” with regards to any liability to its financial guarantee for Watson Limited – a company affiliated with Mallya.

The group revealed in September 2015 that it “may not recover” a £92m loan given to Watson by Standard Chartered Bank, where it acted as a guarantor.

Diageo issued the guarantee to Standard Chartered Bank in order for Watson to release certain USL shares that had been lined up for purchase as part of its acquisition deal.

“Diageo believes, consistent with its prior disclosures, that it has no outstanding obligations to Dr Mallya as regards the establishment of an emerging markets joint venture or the provision of financial benefits,” the group said.

“Diageo would contest vigorously any such claim that may be brought by Dr Mallya whether in the context of a counter-indemnity claim for DHN’s liability under its guarantee of the Watson facility or otherwise.”

In April last year, the board of United Spirits cast a vote of no confidence in Mallya, and urged shareholders to removes him as chairman of the company.

Mallya refused to voluntarily step down, while Diageo said it has “certain contractual obligations” to support Mallya in continuing as non-executive director and chairman of USL.