Getting USL: United Breweries may hold the key for Diageo

Getting the management control of the United Spirits (USL) may be turning out to be a bigger headache than expected for global giant Diageo.

According to a report in the Times of India, public sector banks are unlikely to tender USL shares in the open offer which is to start from April 10.

The report quoting bankers said that they are unlikely to offer the shares as the offer price of Rs 1,440 is much lower than the current market price of the stock.

[caption id=“attachment_689791” align=“alignleft” width=“380”] The order was seen as jeopardising Mallya’s plans to complete stake sale to Diageo. Reuters[/caption]

Banks are desperately trying to recover as much as possible from the grounded Kingfisher Airlines, which has a Rs 7,500 crore loan outstanding with them. Towards this end, they had started to sell shares that were pledged with them.

UB group chairman Vijay Mallya then approached the Bombay High Court to restrain banks from selling these shares. However, the court on 2 April refused to provide any relief to Mallya and said banks are free to sell the pledged shares.

The order was seen as jeopardising Mallya’s plans to complete stake sale to Diageo as it would mean the consortium of 17 banks would be free to sell shares of the subsidiary companies of the UB Group p0ledged with them.

As of 2 April, the lenders hold 3.5 crore shares of USL as collateral, according to a PTI report.

So, what will happen if the banks are not tendering the shares in the open offer? As per the stake sale agreement, Diageo will buy about 27 percent from Mallya and another 26 percent through an open offer. But if the banks are not ready to tender the shares in the offer, the UK drinks giant will not be able to pick up the 26 percent.

That Diageo will not increase the offer price is certain. A Reuters report last week said Diageo’s bid to raise its stake in United Spirits through the open offer is unlikely to succeed as it has opted not to lift its offer price.

“If the open offer is not successful, and it’s unlikely to be, I think Diageo will be very happy to stay with about 30 percent stake and a control over the board and the management,” a source directly involved with the acquisition deal was quoted as saying in the report.

Moreover, as per the agreement, United Breweries, which has a holding in United Spirits, will vote with Diageo for four years.

In effect, it is this arrangement that is likely to work for Diageo.

Meanwhile, another ToI report said with the takeover already getting complicated the global major is unlikely to restructure the top deck of United Spirits for 12 months.

According to the report, Diageo officials met the USL brass in Goa last month and told them that there won’t be a change of the top level management.

Diageo’s 100 percent Indian subsidiary will take care of the sales marketing strategies of USL.