Vijay Mallya has more reason to be worried than a few High Court orders in favour of creditors to the UB Group.
The Karnataka High Court's order on Friday has not only dragged Diageo into the war with creditors, but also thrown in serious jeopardy the Indian liquor baron's holdings in United Spirits Ltd.
When Mallya had signed away control of United Spirits to the British distiller, he had also agreed to be the custodian of its controlling rights in the company. Several clauses of the deal with Diageo indicate that Mallya and his group companies will have to compensate for any loss of stake holdings from the requisite 25% to Diageo.
According to the terms, UB Holdings had agreed to sell additional shares in United Spirits to Diageo at a price of Rs 1,440 per share to ensure that Diageo has a minimum shareholding of 25.1%, should the proposed arrangement of transfer of shares not result in the same.
While Diageo and United Spirits have both said that they will move the Supreme Court against the High Court's order, Friday's decision shaves off about 7% of Diageo's current 26.47% stake in United Spirits.
Analysts say the situation has drawn Diageo into a very complex legal battle, whose solution and end is anybody's guess, with Diageo's stake falling below the minimum 25% threshold not because of the preferential allotment at the time of the sale, but UB Holdings own stake sale that has been annulled by the Court.
"To reclaim the 25% once again, Diageo may once again utilise the term of the deal that said UB Holdings and Kingfisher Finvest will procure the balance for them," says analyst Vivek Veda on Espirito Santo Securities.
"The other options available would be a second open offer by Diageo or an increase of their stake by the admissible 5% every year – both of which will be much more expensive than the original price of purchase," Veda says.
If UB Holdings indeed has to arrange for the remaining shares, Mallya will land himself in a difficult proposition. Of the 13.51% Mallya and his group companies hold in United Spirits, 13.24% is pledged to various creditors. Besides, 6.98% of the total holdings belong to UB Holdings which has been prevented from entering into any transaction until the 5 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 percent to the original deal value of Rs 1,440 a share. Shares of United Spirits closed at Rs 2,670.55 apiece, Friday on the Bombay Stock Exchange.
At any case, UB Holdings has agreed to vote its remaining shareholding in United Spirits as directed by Diageo for a four year period. "UBHL will also vote its USL shares to enable Diageo to ensure that its nominees are appointed to the USL board," Diageo had earlier said.
UB Holdings has sold about 7% of its stake in United Spirits, that records annual revenue of Rs 9000 crore and volumes of 124 million cases, a prized jewel of the UB Group to Diageo Plc, the world's largest distiller.
The move came at a time when Mallya was trapped in a sea of debt mainly as a result of the losses his now grounded carrier Kingfisher Airlines Ltd had been piling.
While Mallya remained a director on the board and chairman of the company, his right to stay on the board will fall through if his various group companies hold less than 1% in United Spirits.
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