Diageo's efforts to develop its presence in India's large, and growing whisky market faces a major hurdle with Indian court ruling nullifying the UK-based spirits group's purchase of shares in India' United Spirits from troubled tycoon Vijay Mallya.
The Karnataka Court ruled on Friday that the sale to Diageo of 10m shares in United Spirits, which dominates India's spirits market, by Mr Mallya – who is locked in a bitter battle with creditors of his grounded Kingfisher Airlines – was null and void.
Mr Mallya sold the shares – which account for around a 7 per cent stake in the Indian liquor company – through his private holding firm United Breweries Holdings Ltd.
However, creditors of Mr Mallya's Kingfisher Airlines – which has not flown since October 2012 – petitioned against the sale, as they are hoping to take the shares themselves as part of their efforts to recover on unpaid loans.
"This is clearly a very big blow to Diageo and also a blow to Mr Mallya," said Nitin Mathur, a consumer industries analyst at Espirito Santo Securities in Mumbai.
Diageo has said it would appeal the verdict, once the full judgment was available. Mr Mallya, the chairman of United Spirits, also vowed a fight.
"We will take all necessary states to protect Diageo's interests as well as our own," the tycoon said in a statement after the ruling.
Diageo engaged in nearly three years of painful on-again, off-again negotiations with the mercurial Mr Mallya for a takeover of United Spirits, which dominates India's spirits market with a 45 per cent market share, and the two finally agreed a deal in November 2012.
Diageo's initial hope was to take a 53.4 per cent stake in United Spirits for Rs1,440 per share, or a total of up to £1.2bn. But the announcement of Diageo's plan to take control of the Indian company sent the share price soaring, and there was little take-up of its voluntary open offering.
As a result, Diageo wound up with just a 25 per cent stake in the company, including the 7 per cent stake it had acquired from Mr Mallya's private holding company, though it since acquired another 1.3 per cent from the open market.
However, the deal has faced complications as a result of Mr Mallya's troubles with the creditors of Kingfisher. The airline was once one of India's most popular carriers, but was forced to stop flying after protests from staff, who had not been paid.
"This judgment is not the end of the saga – but sure, it does raise the question 'when will Diageo start to loose patience,'" said Mr Mathur.
If the judgment stands – leaving Diageo with just 16 per cent of the company, shareholders could question Diageo's management control of the firm.
India's liquor market is seen as highly promising, given the country's relatively low per capita consumption of alcohol, and Indians taste for whisky, a legacy of its British colonial era rule.
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