Glenboden M & A Originations

Potential acquirors of strategic stake in India’s United Spirits

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Origination Status media reports of expressions of interest in tender, March 2009
Asset United Spirits Ltd (India), no.3 global spirits distributor by volume
Buyer candidates may include Diageo, Bacardi, Suntory
Seller UB Group (India), no.1 domestic alcohol beverages company
Buyer Rationale enhanced platform in fast-growing Indian market
Seller Rationale raise funds to reduce debt after Whyte & Mackay acquisition in 2007
NBs UB’s Chairman said that ‘four global spirits makers’ are interested in the USL stake
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Any global or regional Asian spirits group would want to acquire a strategic shareholding in United Spirits. That group is the biggest spirits producer and distributor by far, in an Indian market that's growing fast from a very low base of per capita consumption. It also owns a number of strong local brands. Diageo so far is tipped as favourite to win the tender, but the other interested parties are likely to also be serious ones.

USL claims to have 60% market share in spirits in India, equivalent to 73 mln cases in 2008. Its dominance is to be found in every category, and in every geography, in that vast market.

In terms of brands, the portfolio's biggest is McDowell's No.1, an umbrella covering whisky, brandy and rum offerings. Billed as the most valuable consumer brand by retail value in India, 28 mln cases were sold in 2008, equivalent to 40% of USL's total sales volume, and growing at a rate of 15% in YTD Q3 2009.

The second biggest hit is Bagpiper, described as the biggest non -Scotch whisky in the world, with 14 mln cases sold in 2008. Like McDowell's, and indeed most of the USL portfolio, it's targeted very squarely at the aspirational Indian consumer.

Generally, the portfolio is being developed in all directions. A luxury segment is being built, comprising Whyte & Mackay Scotch, Pinky vodka and Bouvet-Ladubey champagne. There's also a super-premium Indian whisky, Antiquity, and an authentic Russian vodka called Romanov has recently been launched. In total, USL markets 17 brands that sell 1 mln cases or more.

Its Chairman and head of the parent UB Group, Vijay Mallya, has expressed concern that the global economic downturn will eventually affect the Indian consumer, although this hasn't happened yet judging by USL's continued growth rate.

In YTD Q3 2009, USL's sales growth was 18% in volume terms, and 25% in value. This is not only an increase on 2008 growth rates, but also marks a premiumisation trend in the portfolio. This is very attractive to any global spirits player.

Mallya's timing is therefore still good, to attract a strategic partner at a high valuation. This is of key importance, since the main objective of this exercise is to reduce UB's debt raised to acquire Whyte & Mackay, in 2007, at the very high valuation of 600 mln GBP.

Diageo, the world no.1, has been in discussions over USL for a long time. The investment would not only set the group on the path of potentially acquiring USL, one day; it also provides a platform for Diageo's own imported premium brands, especially Johnnie Walker as India is still mostly a whisky market.

One question mark, however, is how such a partnership would sit alongside Diageo's 50:50 joint-venture with Radico Khaitan, the no.2 drinks company in India, for the marketing and distribution of Indian-made foreign liquor in that market.

Another tip to acquire the 15% in USL, in our opinion, is Bacardi. That group has still to make a major acquisition, after having lost the tender for Absolut to Pernod Ricard. It also appears that Stolichnaya is not for sale, after all; in addition Bacardi has so far failed to take Glenboden's advice to acquire the troubled French group Belvedere (Sobieski vodka). USL is another good option.

An outside candidate, but one that's building acquisition momentum specifically in Asia, is Suntory. Unlike the other Japanese beer giants, Asahi and Kirin, Suntory has a significant domestic spirits business already. Its overseas growth targets are very ambitious, and were put into action with its acquisition of Frucor from Danone in New Zealand in 2008. Also, Suntory culturally might be more comfortable with a minority strategic stake in USL than some of the other bidders.

Finally, Suntory might be more interested in buying the Whyte & Mackay brand from USL, than Diageo or Bacardi who already own strong Scotch brands. UB has expressed an interest in selling this brand, which it acquired as a tag-along to the bulk Scotch reserves owned by that business.

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THIS LEAD'S VALUATION
Size (€ mln) 1.350
Sector spirits
Asset Quality India no.1 branded
Seller large plc
Buyer large corporate
P/S n/a
P/Ebitda 12,5
Type value estimate
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