 "United Spirits-Diageo: Why court order may turn tables on Mallya")
Shares in United Spirits today fell 6 percent after the Karnataka court ordered the annulment of the sale of United Breweries Holdings’ (UBHL) 6.97 percent stake in United Spirits to British group Diageo.
Responding to a petition by creditors of UBHL, the court said that an earlier company court order which allowed the share sale by UBHL to Diageo did not have the jurisdiction to do so. There are five winding up petitions filed by creditors pending in the court against UBHL. Creditors have been trying to recover their money from the debt laden group after it defaulted on payments.
In the agreement signed with United Spirits in November 2012, Diageo hadalso warned that if the courts passed winding-up orders against UBHL, the sale of shares by the holding company in United Spirits may be deemed void.
[caption id=“attachment_1205597” align=“alignleft” width=“380”]  AFP[/caption]
For beginners, the stake deal between United Spirits and Diageo had a complex structure. Diageo was to buy a 53.4 percent stake in United Spirits for about Rs 11,000 crore. Of the 53.4 percent, 26 percent was to be acquired through an open offer and 27.4 percent directly from the companies. As much as 19.3 percent was to be acquired from UBHL and others. The balance 8.1 percent was to be preferential allotment of shares. After a open offer, in which investors did not tender the shares as they saw a better future for United Spirits under Diageo, the UK major managed to get only 26.37 percent stake. As against the targeted 26 percent, it got a mere 0.04 percent. UBHL had sold 6.97 percent of its United Spirits stake to Diageo.
According to reports, UBHL is likely to file an appeal in the Supreme Court when it opens in January. Diageo in a statement on Saturday said it will challenge the high court’s decision too.
Impact Shorts
More Shorts“If the SC grants a stay, the shareholding will not change until it delivers an order,” a Kotak Securities report said. “In case the apex court upholds the HC’s decision, nearly 7 percent equity will go back to UB Holdings and its stake in United Spirits will increase while that of Diageo will fall from 26.4 percent to 19.4 percent.”
This is likely to make it tough for the Britishdrinks company to manage the Indian firm and implement major decisions. In other words, if the SC holds the HC judgement, shareholders could question Diageo’s management control over the firm.
Kotak, however, believes the development will not affect management control at Diageo.
This is because, as per their agreement, voting control of shares held by the UB Group will be with Diageo till earlier of four years from the date of transaction or in case Diageo assumes majority shareholding in the company. In other words,in the event of the latter not having majority control in USL, UBHL would vote its remaining shareholding in USL as directed by Diageo for a period of four years.
According to Kotak, the worst case scenario if the SC upholds the HC’s decision, is that Diageo would lose 7 percent stake in United Spirits and cash that Diageo had paid for the stake will be returned.
“If UB Holdings is not able to return the cash, Diageo can initiate recovery proceedings against the company,” the Kotak report said.
“Subsequently, Diageo can increase its shareholding either through open market purchases or through another open offer. It could also bid for the UB Holdings’ shareholding as and when a liquidator organizes sale of assets of the company.”
According to a Business Standard report, if UB Holdings has to arrange for the remaining shares, Mallya will land himself in a difficult proposition.
“Of the 13.51 percent Mallya and his group companies hold in USL, 13.24 per ent is pledged to various creditors. Besides, 6.98 percent of the total holdings belong to UB Holdings, which has been prevented from entering into any transaction until five winding-up petitions against the company are sorted. Should Mallya procure the additional shares from the open market, he will have to shell out a premium of about 80 per cent to the original deal value of Rs 1,440 a share,” the BS report said.
The root of the problem is debt-laden Kingfisher Airlines, part of the corporate empire Vijay Mallya, which owes tens of millions of dollars to creditors.
Mallya’s UB Group is the owner of UBHL and previously owned United Spirits. Kingfisher grounded operations owing to Rs 6,000 crore to creditors as of September. UBHL was guarantor for some of these loans, and creditors of the bankrupt airline have since sought to recover the loans by trying to stop the Diageo deal, said a_Reuters_report.
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