Diageo bets billions on Indians' love for whiskey

Last week's offer for shares it does not own in India's biggest liquor company is more than double a 2012 bid spurned by many investors as too low that forced Diageo to settle for a lower stake.

While Diageo has de facto management control of Bangalore-based United Spirits thanks to its 28.78-per cent share, analysts believe the British company needs majority control to implement its growth strategy for the world's biggest whisky market.

"Diageo is doing the right thing, given the very significant long-term upside for the Indian spirits market," said London-based Citi analyst Andrea Pistacchi.

Vijay Mallya, India's self-styled "King of Good Times" who is locked in a bitter fight with creditors of his grounded premium airline, Kingfisher, holds just under 10 per cent of United Spirits but he remains company chairman.

Formal majority control of the liquor company should "help ensure faster and smoother delivery of Diageo's objectives," Pistacchi added.

Diageo's bid has assumed greater significance in light of a string of recent deals in the global liquor industry that have threatened to topple the British distiller from its perch as the number one spirits maker by sales.

Diageo, the company behind names such as Johnnie Walker scotch and Smirnoff vodka, has vowed to preserve its top-selling status worldwide and not remain still.

The new offer, priced at 3,030 per share, opens June 11 and aims to lift Diageo's stake in United Spirits to 54.78 per cent.

The bid is steered by India-born company veteran Ivan Menezes, who took charge last July of Diageo and who last month reorganised his management team to focus more on India.

Emerging market focus

India has long been in the sights of Menezes, who aims to source at least 50 per cent of Diageo's sales from emerging markets, up from 42 per cent now, as developed market growth slows.

Figures from research house Euromonitor show how key India is to Diageo's calculations.

The country already guzzles one-half of whisky sold worldwide -- a share forecast to rise to 70 percent by 2017, according to Euromonitor.

Diageo on Thursday said sales globally, excluding from acquisitions, slumped 1.3 per cent in the quarter ended March 31 from a year earlier. But it reported "double-digit" growth in India.

India is expected to "become Diageo's number two market after the United States" and has "potential, in the long term, to become our largest market", Menezes has told analysts.

Headroom for growth is high with per capita whisky consumption in India at 1.2 litres compared with 2.15 litres in France, Euromonitor data shows.

United Spirits gives Diageo the firm's vast distribution network for its flagship Johnnie Walker, the whisky of choice for India's upper middle classes, and other products.

But most importantly United Spirits gives Diageo entry into the popular lower priced domestically made segment of the whisky market.

Local Indian whisky, made with distilled molasses spirit, accounts for over 50 per cent of whisky sales in the country.

With Diageo's know-how and deep pockets, analysts expect United Spirits to try to develop more premium-range products.

"The consumer in India is trading up" as the middle class grows and tastes become more sophisticated, Menezes says.

If shareholders accept Diageo's latest offer, and analysts believe they will, Diageo will have paid $2.8 billion for United Spirits, up from the $2.1 billion originally targeted.

"After a year of exposure to USL, warts and all, Diageo has much greater confidence in its business case and is willing to reflect that in a higher price," said Trevor Stirling, analyst at Bernstein Research.

Diageo has not "taken leave of its senses," Stirling added.