Glenboden M & A Originations

United Breweries makes breakthrough into premium spirits brands with Whyte & Mackay purchase

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Origination Status company acquisition announced, May 2007;
Asset Whyte & Mackay (UK), Scotch whisky brand and leading global producer of bulk Scotch;
Buyer United Breweries (India), no. 3 global spirits distributor (region-specific);
Seller Vivian Immerman and Robert Tchenguiz, international businessmen;
Buyer Rationale access to supply of Scotch for distribution in India, premium Scotch brand;
Seller Rationale attractive valuation, exit from portfolio company;
NBs Whyte & Mackay has est. 10% global Scotch share, mostly through bulk sales.
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Timing is everything in M&A activity. Immerman and Tchenguiz bought out the investment bank WestLB in 2005, at a time when Whyte & Mackay was making losses thanks to falls in bulk and private label Scotch prices. Now, in contrast, Scotch prices are ‘increasing rapidly’, to the extent that W&M’s bulk stock, of 115 mln litres, has become a ‘must-have’ asset for UB, for serving the Indian market. It’s very significant the UB has also agreed to pay a premium for the White & Mackay brand, after all, which suggests that the potential for premium Scotch demand in India is getting stronger. That would set a precedent for UB to make more acquisitions of premium western spirits brands in future.

We earlier estimated that the selling partners’ valuation target was a 200 mln GBP for the branded portfolio, to match the MBO price back in 2001, plus a further 400 mln GBP upside to reflect the value of the Scotch stocks. It looks like the guys have achieved their objective almost precisely (save 5 mln GBP in transaction costs or ego –costs).

As so often in M&A situations, where somebody buys an asset, then waits until the business cycle is more favourable before selling with a large upside, the valuation seems quite attractive for the buyer also.

The sellers announced that W&M’s operating income will be 50 mln GBP (in 2007), and is growing at an annual rate of 20%. Making an assumption for depreciation, this translates into quite a low EBITDA valuation by contemporary standards.

On the other hand, most of W&M’s sales are of bulk and b2b Scotch sales, which are subject to price volatility. It seems that UB was prepared to pay what the sellers of W&M wanted, to gain a ‘perennial source’ and eliminate price risk of bulk Scotch, which it blends with domestically produced whisky, for sale in the fast-growing Indian market.

Such a blend can be called Scotch, but doesn’t suffer the punitive import tariffs of pure Scotch, and has the added benefit of being cheaper to produce.

In our earlier review of this deal, we suggested that UB won’t want to pay a ‘trophy’ price for the ‘Whyte & Mackay’ brand portfolio, and indeed may not want it at all, given that their initial price offer was only 400 mln GBP.

However, UB has now paid that premium, emphatically stating that it has ‘bought 100%’ of W&M. Perhaps demand for premium, genuine Scotch whisky is growing in India faster than UB had expected, in spite of the price penalties; or maybe the regulatory regime is liberalising.

Whatever the reason, this sets a precedent for UB, with its unrivalled distribution power in India (60% market share), to acquire more ‘old world’ premium brands across the spirits’ spectrum.

In terms of secondary divestments after this deal, UB is perhaps unlikely to want the UK private label and b2b business of W&M. That might be sold off to e.g. William Grant, rumoured to be after this part of Whyte & Mackay, with which it has synergies.

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THIS LEAD'S VALUATION
Size (€ mln) 890
Sector spirits
Asset Quality bulk Scotch and brand
Seller individuals
Buyer large plc
P/S n/a
P/Ebitda 10,0
Type total consideration
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