Sep 27, 2012 05:32 PM IST | Source: ft.com

Diageo: An Indian dram

Black Dog whisky and White Mischief vodka could soon be part of Diageo's portfolio if it succeeds in buying a stake in India's United Spirits. Diageo has become a dab hand at this sort of deal recently.

Diageo: An Indian dram

Black Dog whisky and White Mischief vodka could soon be part of Diageo's portfolio if it succeeds in buying a stake in India's United Spirits. Diageo has become a dab hand at this sort of deal recently. The formula is straightforward - buy an emerging markets spirits company with a good local position, then use its distribution system to sell Diageo's premium brands such as Smirnoff and Johnnie Walker.

The talks with United Spirits, confirmed on Tuesday, follow a similar model, but with important differences. The first is the scale. Despite Indian prudishness about alcohol consumption, United is the largest spirits company in the world by volume (although much smaller in terms of value). Although Diageo already has a business in India, United is the market leader. Second, the stake is being sold by Vijay Mallya, whose Kingfisher Airlines business is in deep trouble. While he may want to sell down his 30 per cent stake to raise cash, he may not be so happy to cede control.

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On top of that, selling premium brands in India is not quite so straightforward. There is a 150 per cent import tariff on spirits, which gives local drinks a big advantage. And once inside the country, Diageo would have to negotiate India's murky spirits market in which each state sets its own rules. Having a well connected local partner such as Mallya would help, but Diageo might not like the market dynamics.

The acquisition of, say, a 25 per cent stake for £650m (on a valuation in line with other recent spirits deals) would not break the bank for Diageo. In exchange it would get a company whose profits are expected to grow 22 per cent this year with the potential to improve margins (at 13 per cent they lag Diageo's own 30 per cent). More importantly, it gets a foot in the door with India's biggest spirits company. If and when the tariffs start to fall, Diageo would be well placed to move in quickly.

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