USL-Diageo: Deal completion to take time on regulatory woes

USL-Diageo have publicly declared their intent to tie up but the spirits majors are in for a long courtship as there are several regulatory hurdles to clear. CNBC-TV18's Sajeet Manghat and Ashmit Kumar report that the deal could be consummated only in the second half of next year and once complete, Diageo will not only own USL but also Bangalore Royal Challengers.

Also read: USL-Diageo deal long term positive for stocks says Tulsian
Shareholders of USL certainly have reason to cheer with the stock putting on over 30% in a single trading session on the news of Diageo taking control. However, Vijay Mallya who agreed to give up control at must feel a tinge of disappointment. Not just USL, Mallya will also lose control of his prized IPL team Bangalore Royal Challengers to Diageo.
Confirming the news to CNBC-TV18 Diageo said, "The cricket team is currently held in a wholly-owned subsidiary of United Spirits. We would anticipate that this ownership structure and the related sponsorship would continue."
There is still no clarity on whether this change needs approval of the BCCI. In fact regulatory clearances in the UK and India are key to the completion of the USL- Diageo deal.
USL will have to seek the approval of the Competition Commission of India (CCI) besides the market regulator, SEBI.  USL controls 41% of the Indian market, followed by Pernod Ricard with a 9% market share, while Diageo has a mere 1% of the Indian market.
Diageo will also have to seek approval of the UK Office of fair trade, to convince the regulator that its acquisition of USL will not give it competitive advantage with respect to White & Mackay.
This deal will also have to pass SEBI's muster on two counts: One - UB Holdings has signed a put option to sell the rest of its stake to Diageo at a price of Rs 1,440. The put option will be active for seven years from the day of Diageo achieving 50.1% stake in USL or one year of consolidation of USL financials for Diageo whichever is earlier.
Diageo will also have the right of first offer over the remaining stake of UBHL. In the past, SEBI had disallowed Vedanta-Cairn Plc from similar put options forcing Cairn to amend the agreement.  The other issue SEBI will have to consider is affirmative voting rights.
As per the deal if Diageo's stake is less than 50.1%, UBHL is obligated to vote in favour of all resolutions proposed by Diageo for next four years.
With the stock price crossing the Rs 1800 per share, it is highly likely that institutions - MFs & FIIs who hold 51.3% in USL will tender their shares.
Diageo will also have to deal with the de-listing guidelines as It will have to make an additional open offer for Pioneer Distilleries, in which USL holds 82% stake. Diageo has made a mandatory open offer fat Rs 60 per share for the remaining 18% and it will look at de-listing the company 6 months after completion of the open offer.
So the wait for funds will continue till the deal gets an NoC from different regulators.