United Spirits shareholders have last laugh with Diageo's new open offer - Livemint

Shareholders of United Spirits Ltd (USL) should be pleased with Diageo Plc.'s decision to make a second open offer. In November 2012, Diageo had announced an open offer at Rs.1,440 a share, the same price it paid to the United Breweries (UB) group to acquire part of its stake in USL. But shareholders were unimpressed as this price was a mere 6% premium to the then prevailing market price. Diageo did not hike the price and the open offer netted very few shares.

Why this change of heart now? Diageo never really needed the open offer to succeed, as it had stitched together a clever deal. It would hold a 27.4% stake in USL, while the UB group (with a 13.4% stake) would vote at Diageo's discretion. And, it could also buy out the UB group's stake later through a put option. In effect, without spending Rs.5,441 crore in the open offer for a 26% stake, Diageo could still control USL. Only Rs.8.5 crore worth of shares were offered in the open offer.

But fate was not kind to Diageo. Announcing the deal closure in July 2013, it disclosed that it was unable to acquire a 2.38% stake from the UB group, due to a dispute. The Securities and Exchange Board of India's (Sebi's) objections to the put option saw it being dropped to allow the deal to go through.

More recently, another blow was a court ruling putting at risk Diageo's purchase of a block of shares from United Breweries (Holdings) Ltd, amounting to a 7% stake in USL. How long this litigation takes to get resolved and what will be the final decision is uncertain. If Diageo loses the case, it will be in an uncomfortable position. The UB group's obligation to vote with Diageo ends in mid-2018, as its July 2013 deal completion announcement had said that this obligation will cease "at the end of the fourth full accounting period of Diageo after today's date". Diageo's financial year closes in June.

What's more, the UB group's stake has been falling and was down to 8.9% as of 31 March. Diageo's open market purchases, however, have seen its stake rise to 28.9% (including the stake under litigation).

The current open offer seeks to make Diageo's control over USL absolute, irrespective of external events. But this clarity of purpose comes at a price. Diageo is now willing to shell out Rs.11,449 crore to acquire a 26% stake at Rs.3,030 a share, a premium of 18.5% over Friday's closing price.

Diageo's fund outlay has increased 2.1 times from its initial offer. Even if we add a similar premium to the price as on 9 April 2013, a day before the first offer had opened, Diageo's outlay would have been only Rs.8,023 crore.

Diageo's offer may seem generous compared with the one made in November 2012, but shareholders will treat this as a fresh slate. The USL stock went up by 11.6% on Tuesday and as a result the open offer's premium has dropped to 6.2%. Shareholders may want more, especially as they are likely to sense that Diageo is now keen on hiking its stake.

Refusing Diageo's advance the first time has certainly not hurt shareholders, and may tempt them to hold out again. The risk at the moment is that USL's performance in 2013-14 so far has not been altogether inspiring. If the company does poorly in the March quarter too, some shareholders may decide to take advantage of the open offer. But others may keep their eyes on the long-term potential of the liquor business and this company's market position. That is anyway the reason why Diageo is spending through its nose to hike its stake in the first place.

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