According to media reports, British distiller Diageo plc (DEO) has received the final nod for its entry into India. The joint venture between Diageo and Vijay Mallya’s United Spirits got a clean bill of health from the fair trade watchdog Competition Commission of India ('CCI').
The commission is of the opinion that the tie between the two spirits companies will not affect the competitive environment in the country. The commission also noted that United Spirits and Diageo operate in different price segments and the cost overlap of their products within these segments is minimal.
The tie-up is also expected to boost product innovation and thus bring new variants within the existing price bands giving wine lovers in India more choice.
The agreement between Diageo and India’s largest spirits company United Spirits Ltd. entered into an agreement, according to which Diageo will acquire a 53.4% stake in the latter for 1.285 billion pounds ($2.05 billion), in order to venture into the fast-growing alcohol market in India.
Under the agreement, Diageo will buy a 27.4% stake in United Spirits for INR 1,440 per share ($26.32 per share), amounting to a total consideration of 660 million pounds ($1.05 billion), and make a tender offer for the remaining 26%. Diageo will finance the acquisition through existing cash and debt. The deal is expected to close in the first quarter of 2013.
United Spirits is owned by Indian entrepreneur Dr. Vijay Mallya, who needs cash to bail his Kingfisher Airlines out of bankruptcy. Besides financial strength, the acquisition will provide United Spirits with bright opportunities ahead. Following the acquisition, Dr. Mallya will continue in his current capacity as Chairman of United Spirits.
After the fair trade regulator received a notice regarding the tie up in Dec 2012, it obtained many clarifications from both the parties and finally gave its approval for the spirits giant’s entry into India.
London-based Diageo, whose brands include Johnnie Walker, Smirnoff and Guinness, has been exploring opportunities to expand geographically through acquisitions. In furtherance of this strategy, it has acquired companies with a strong indigenous presence like Mey Içki in Turkey, ShuiJingFang in China and Halico in Vietnam in fiscal 2012. In June last year, Diageo also bought Cabin Fever Maple Flavored Whiskey in the U.S. to tap the growing markets for flavored whiskey and craft distilling.
Currently, Diageo plc carries a Zacks Rank #2 (Buy). We would also recommend stocks like Compania Cervecerias Unidas S.A. (CCU), which carries a Zacks Rank #1 (Strong Buy), as well as Molson Coors Brewing Company (TAP) and Grupo Modelo, S.A.B. de C.V. (GPMCY), both of which carry a Zacks Rank #2 (Buy). These companies also offer attractive exposure to alcoholic beverage segments.
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