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How the Mallya-Diageo deal was finally ironed out

November 12, 2012 09:12 IST

The landmark Rs 11,166-crore (Rs 111.66 billion) deal between United Spirits (USL) and Diageo that got inked last week is among the top two cross-border transactions in India so far during 2012. P A Murali, joint president & chief financial officer of the $2-billion USL, was the key person other than USL's Vijay Mallya who put this complex deal through to its logical conclusion. Murali had earlier played a vital role in many of USL's key global transactions, including the acquisition of Whyte and Mackay Group of the UK, Bouvet Ladubay SA of France and Liquidity Inc. of the US. In an interview from London to Raghuvir Badrinath of Business Standard, Murali detailed how the transaction was finally ironed out. Excerpts:

Given that you were one of the key players in this important transaction, how do you feel after clinching it?

The feeling is of a sense of achievement, especially because this is a dream combination, a win-win situation for both parties. The fact that the deal was done at a price which was 113 per cent over the last unaffected price and 87 per cent over the last 52 weeks' average price and 31 per cent over the Sebi floor price for open offers on the stock bears testimony to the value that this transaction has brought to the table for all stakeholders.

What were the major hurdles you faced and how did you cross these?

This is a complex cross-border deal, where the requirements of all the parties concerned need to be borne in mind. The complexity being borne out by the fact that while the true nature of a partnership needs to be preserved and captured without apparent loss of control, Diageo's need to demonstrate the path to control over a period, mainly to facilitate consolidation with their balance sheet, had to achieved. But the thread of partnership is consistently interwoven through the agreements.

The seeds of this deal, according to Mallya, were sown nearly six years ago. Mallya and Diageo came close to a deal during 2008-09 but could not see it through. What were the key elements that fell in to place this time?

We never lost touch with each other after the last discussions in 2008-09, which unfortunately fell through. I didn't see any different level of intensity this time, compared to last time. There was an unwavering purpose on approach to reaching the deal and I should say that at no point in time was there an effort to take undue advantage of a particular situation over the last several months of engagement.

I am sure you are aware that United Spirits has several other options to de-leverage its balance sheet and, therefore, this deal is more about a strategic partnership than about having to raise funds.

The fact that in terms of transaction multiples, this deal is at a multiple of 21 times Ebitda (earnings before interest, taxes, depreciation, and amortisation), whereas the global median is 13.6 and the P/E (price-to-earnings) ratio is at 48.3 while the global average is just 19, goes to prove the transaction was at more than fair and full value for an entry, which has an important strategic value.

Did Diageo agree to engage seriously with USL with a clear intent that it wants a majority control or did it evolve at a later stage?

The fundamental philosophy of all of Diageo's acquisitions about the need to consolidate the numbers was laid out right from the beginning and, therefore, it presented a unique challenge to create a true partnership on the back drop of such an imperative need.

The aspect of how Diageo will address the issue of Whyte & Mackay is not clear. The Office of Fair Trade in the UK will surely raise the issue that Diageo will get to control W&M and this will lead to  a monopolist situation. How does Diageo intend to address that?

From my point of view, Whyte and Mackay is an integral and important part of USL. It is too early to pre-judge any move or conclusion on this.

At the end of day, even if Vijay Mallya says this is a partnership and embellishing of family jewels, USL will be managed by Diageo. What were the top few critical aspects that pushed the management of UB Group to accept the offer from Diageo and offer them majority control?

As I said earlier, except for the strategic need to get a partner of the high pedigree and repute of Diageo, there was no compulsion to do a deal. The fact that we have always believed both our alcoholic beverage businesses needed a strategic partner to maintain its leadership position for the very long haul in a very competitive environment was re-emphasised by Mallya several times in the past.

This deal with Diageo and that of United Breweries in the past with Scottish and Newcastle/Heineken are a manifestation of that longstanding belief. The fact that there was and has been no change in management in United Breweries over the past several years, coupled with the fact that neither has Diageo expressed any desire or plan to overhaul the current management of USL goes to prove what a fine and thoroughly professional management team has been built and nurtured by Mallya over the years.

Most important, the fact that Mallya will continue in his current role as chairman of the company to steer it to greater heights also drives home the point that the underlying intention of the transaction is one of a partnership and not of acquisition.

Raghuvir Badrinath in Mumbai
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