A few contingent agreements in the $2.1-billion deal between United Spirits (USL) and UK's Diageo Plc has irked the regulators. According to Securities and Exchange Board of India (Sebi) officials, it is likely that permission for over Rs 5,500 crore open offer will be granted only after a few clauses are dropped from the agreement as they are also contingent upon the regulator.
One of the clauses in agreement gave the UK-based company the first right of refusal to withdraw from the open offer if the offer price was revised upwards by Sebi.
JM Financial, the manager to the open offer, had announced that Diageo Plc will launch a mandatory share tender offer to buy up to 26% additional stake in USL from public between January 7 and 18, 2013. However, the offer got delayed as Sebi, Reserve Bank of India and Competition Commission were yet to approve it.
Legal experts criticised the deal structure as open offer to acquire shares from public was announced at Rs 1,440 a share, even before it got triggered. This, legal experts say, was done by the acquirer to avoid paying higher price of buying shares under the open offer in case of further share price rally, which was a natural anticipation post the deal announcement.
Diageo, the world's largest spirits maker, agreed to pick up a majority stake in USL through a multi-structured deal. In a joint statement in November, Diageo said it entered into an agreement with United Breweries Holdings (UBHL) and USL to acquire 27.4% stake in the latter at Rs 1,440 per share. Diageo was to acquire 19.3% stake in USL from UBHL group and further transaction was based on contingent agreements, which were structured in a way that if one agreement fails to achieve the desired result, another was to be activated.
Mere purchase of 19.3% stake by Diageo in USL was not enough to trigger an open offer, which was a pre-mature announcement. The deal announcement said that the acquirer would further seek approval from USL shareholders for a preferential allotment at Rs 1,440 per share of new shares amounting to 10% of the post-issue enlarged share capital of USL and it was its preferential announcement that could have triggered open offer.
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While USL shareholders approved issuance of fresh equity to Diageo in December, which then triggered the open offer against the one announced earlier, there is another clause in the preferential allotment agreement (PAA) that is controversial, said a Sebi official.
Public announcement said “Notwithstanding anything contained in the PAA, in the event that on account of the PAA, the offer price is revised [or is likely to be revised] upwards, pursuant to any order or direction of Sebi, the acquirer may elect not to subscribe to the preferential shares, in which event the acquirer shall, save in certain circumstances, not be eligible to acquire the additional shares under the SPA."
The share price of USL rallied nearly 50% from Diageo acquisition price of Rs 1,440 to tough a high of Rs 2,149 on stock exchanges on November 29. If the open offer price is revised upwards due to the volatility in share price, acquisition cost for Diageo would rise. Therefore, a clause in the deal gave the UK company the first right to withdraw from the deal, legal experts said.
"The dilemma is that such a clause is contingent upon the regulator and tries to act as a potential threat against revising the open offer price, if the need be as per rules. If Sebi were to revise the offer price, trigger for open offer may not happen at all. This is strange as trigger for open offer is irreversible post the acquiring more than 25% stake," said JN Gupta, former executive director at Sebi and founder of Stakeholder Empowerment Services (SES), a proxy advisory form.
JM Financial refused comment on the issue.
SES had issued a report highlighting regulatory violations in case of USL-Diageo deal. The contingent agreements has a potential affect of limiting Diageo to have only 19.3% shares in USL, if Diageo elects not to subscribe under PAA and UBHL refuses to sell additional shares, SES said. According to deal announcement, if preferential allotment was not approved, Diageo would buy additional shares from UBHL to take it to the trigger point for open offer. But this part of transaction would materialise only after failure of preferential allotment.
SES believed since USL share price has shot up sharply from Rs 1,440, the open offer may not be in conformity with regulation 8, specially regulation 8(2)(d) of Sebi’s Takeover Code. The issue becomes further complicated by declaration made in public announcement by merchant banker. This declaration puts the onus of success of transaction including public offer and preferential offer at the door of Sebi. This is because if the offer price is to be revised upwards Diageo has an option not to subscribe to preferential offer and not eligible to get additional shares from UB group except in certain circumstances. What are these circumstances is not in public domain.