British fair trade watchdog OFT on Monday said Diageo's acquisition of United Spirits is against competition and may lead to higher whisky prices in the UK.
The Office of Fair Trading (OFT) will have a fresh look at the deal in the wake of a new proposal made by the companies to sell bulk of Whyte & Mackay business of Indian liquor major to address the competition issues in the British whisky market.
Diageo Plc and United Spirits Ltd are both major suppliers of spirits worldwide. In the UK, United Spirits' subsidiary, Whyte & Mackay, is primarily active in the supply of whisky, besides being a player in other spirits, including vodka.
The regulator said the merger may lead to a substantial lessening of competition in the supply of blended whisky to retailers.
OFT came to the conclusion after analysing evidence including data on consumer switching between brands, economic modelling and internal documents.
Chris Walters, OFT's Chief Economist and Decision Maker in this case, said the two companies are leading suppliers of blended bottled whisky in the UK, especially to supermarkets and other large retailers.
"Our investigation considered a wide range of evidence and we concluded that the likely loss of competition could give rise to higher prices for retailers, and ultimately consumers," he said in a statement.
Diageo has offered to sell most of its Whyte & Mackay business to address competition concerns regarding bottled blended Scotch whisky. Walters said the watchdog is now considering Diageo's offer to sell the bulk of the Whyte & Mackay business with the exception of two malt distilleries.
According to the OFT, a number of retailers have expressed concerns about possible price rises for bottled blended whisky sold in the UK due to the merger. In February this year, Competition Commission of India (CCI) had approved Diageo Plc's majority stake purchase in Vijay Mallya-led United Spirits.
The proposed transaction worth about $2 billion would provide much needed cash for Mallya's UB group, whose aviation venture Kingfisher Airlines is facing turbulent times.
Under the deal, Diageo would acquire up to 53.4 per cent stake in United Spirits, one of the largest spirits firm, within five years.
According to OFT, a number of retailers expressed concerns to the OFT about possible price rises for bottled blended whisky sold in the UK due to the merger.
Investigations by the British watchdog found that there is substantial competition in the retail sector between Bell's whisky, a Diageo label, and Whyte & Mackay's own-label and branded blended whisky.
However, an analysis revealed that the merger may lead to a substantial lessening of competition in the supply of blended whisky to retailers.
Besides, fair trade regulator considered to what extent other manufacturers of blended whisky were capable of competing with the merged business.
"The evidence showed that other manufacturers did not have, and could not quickly reach, sufficient capacity to offset the loss of competition likely to result from the merger," it said.
Meanwhile, the proposed bulk sale of Whyte & Mackay, would exempt the divestment of Dalmore and Tamnavulin malt distilleries, among others.
Dalmore and Tamnavulin brands, its maturing inventory and sale of product from these sites would be also excluded.
As such the proposed undertakings in lieu of a reference will cover all of Whyte & Mackay's blended Scotch whisky brands including Whyte & Mackay as well as its private label operations, the OFT statement said.