INDIA BUSINESS WORLD - MAY - JUNE 2007
The Month that was ...

UNITED BREWERIES FINALLY INKS THE $1.18 BILLION ACQUISITION OF WHYTE & MACKAY

Mallya's has acquired 100% in Glasgow based Scotch giant Whyte & Mackay, the world's fourth largest Scotch maker. It cost him a nifty $1.18 billion (£595 million) in enterprise value, but he thinks it's worth it. And the market clearly agrees: United Spirits stock vaulted 7% on NSE to close at Rs 896, taking the market cap close to $2 billion.

This deal, according to Mr Mallya, makes UB Group the world's second largest liquor maker and gives it access to a host of internationally acclaimed brands. At a time when India Inc is estimated to have splashed a record $23 billion in overseas acquisitions in 2006, a jump of 415% over the previous year, this one's more than just another deal.

The maverick businessman, who's being called 'India's Richard Branson' by the UK media, started off his new ownership on a sentimental note - saying that Isle of Jura was his father's favourite single malt, and now, 35 years later, he owns it. In return, outgoing owner Vivien Immerman presented Mr Mallya with a bottle of 65 year old Dalmore - recently, a bottle of 64 year old Dalmore sold for £50,000, making it arguably the world's most expensive single malt.

Just opposite the Hilton, where he was making the announcement, looms Whyte & Mackay's headquarters, a landmark in Scotland, where the Scotch story begins and ends. Or at least where it used to end till Mallya muscled in on the closed boys' club. With this acquisition Mr Mallya's consistent expansion of his liquor business over two decades brings a clutch of Scotch brands into his fold, and gives him a launch pad to become a global liquor player. Brands he'll get include Whyte & Mackay Scotch, Isle of Jura Single Malt and Dalmore Single Malt, as well as Vladivar Vodka - providing him an opportunity to penetrate European, Russian and Chinese markets, besides keeping competition from the likes of Diageo and Pernod Ricard at bay in India. More importantly, Whyte & Mackay's stocks of aged bulk Scotch is now available to UB.

Whyte & Mackay will become a 100% subsidiary of United Spirits but will retain its independent identity. The leveraged buyout was funded by a line of credit from ICICI Bank UK (£325 million) and Citibank (£310 million). The £40 million remaining after the acquisition cost would facilitate headroom for near term capital expenditure requirements. The funding was based on £325 million of debt on strength of Whyte & Mackay's target assets, with no recourse to USL, and the balance in an overseas SPV of USL. "This will put UB into a new trajectory, and it was great working on this deal," said ICICI Bank UK head Sonjoy Chatterjee.

United Spirits' exposure to the debt financing is leveraged on the treasury stock, which accounts for 14% of the company's outstanding share capital. At stock closing, the treasury stock is worth around $300 million. Whyte & Mackay's inventory has been independently valued at £380 million, and the brands at £150 170 million.

The former chairman and owner of Whyte & Mackay, Mr Immerman, will remain as a strategic advisor, though not in an executive role. Vijay Mallya will be the chairman and chief executive. The current MD Bob Brannan will continue in the role, while senior United Spirits executive Alok Gupta will move into a role spearheading branding and marketing initiatives.

Mr Immerman, who bought and turned the company around four years ago, said, "With The UB Group's ability to sell and market brands, Whyte & Mackay will be taken to a new level again. Vijay is a world class businessman with honour, integrity, flair and a great instinct for business. I look forward to working together with him to further build a premium international spirits business." Mr Immerman had earlier stated that he would not sell the company unless "it was going to a good home".

The buyout, United Spirits said in an analyst presentation, will increase the scale of UB by 33% and EBITDA by 80%. and margins by 5%. With the buyout, the annualised depletion of United Spirits is estimated at 74.5 million cases. However, Mr Mallya's claim that this deal would make UB the world's second largest liquor maker should be viewed against French giant Pernod Ricard's reported volume of 77 million in FY06. Sector analyst expect Pernod Ricard to project a volume of 83 85 million cases when it shows up with its FY07 figures in the next two months.

Second or not, Whyte & Mackay's bulk Scotch inventories of 115 million litres would help United Spirits meet its own growing requirements for its brands in India. The Invergordon Distillery near Inverness is one of the largest Scotch whisky distilleries with a capacity to produce 40 million litres of alcohol a year. This production resource will provide United Spirits with a perennial source of Scotch whisky to meet its global requirements. In addition, Invergordon will remain a key strategic provider of bulk Scotch whisky to industry majors.

Mr Mallya said the deal will help in making available Scotch whisky in India, China and the Gulf. With the new acquisition, United Spirits - which has been looking at getting listed at New York and Singapore bourses -may now look at the London Stock Exchange as well, Mallya said.

The earnings of Whyte & Mackay would cover the cost of acquisition in the near future, Mallya said. "The annual operating profit of Whyte & Mackay is approximately £50 million and expected to grow at 20% per annum for the foreseeable future while the revenue line has grown 30% in the current year," a statement issued by United Spirits said.

Whyte & Mackay, the fourth largest scotch producer, also owns Glavya Liquer and several economy Scotch whiskies such as Mackinlays, John Barr, Cluny and Claymore.

Explaining the logic behind the acquisition Mallya said: "Until today, the only missing link in our portfolio has been Scotch and due to the shortage and rapidly increasing prices of Scotch whisky, we needed a reliable supply source to secure our future, considering that we use Scotch in our Indian blends. The potential for Scotch whisky in India is enormous and with the acquisition of Whyte & Mackay we now have a strong portfolio of internationally recognised brands that we will immediately introduce into the Indian market and use our strong distribution network fully to our advantage. In addition, we now have access to international distribution and can look forward to exporting our brands from India."

According to analysts, the acquisition seems a good fit despite high valuation as it clearly bolsters United Spirits standing in the global arena and as well as enhancing its brand portfolio in the domestic market.