ED, Sebi to probe Mallya-Diageo deal for South African Breweries

The Securities and Exchange Board of India (Sebi) and the Enforcement Directorate (ED) are set to study a transaction between British multinational Diageo and UB group Chairman Vijay Mallya, in which the British firm acquired the South African Breweries' traditional sorghum beer business for close to $77 million.

The January 2013 transaction to acquire 50 per cent in the beer business was announced within months of the sale of United Spirits to Diageo in November 2012. The money was paid to Mallya in two tranches in his offshore accounts. In April 2015, Diageo had taken full control of the business by buying the other 50 per cent from Pestello Investments, a Mallya-owned company. The entire transaction was completed in May last year.

The offshore accounts and Trusts based in tax havens of Mallya are currently under investigation by the ED and the Central Bureau of Investigation.

Sebi had earlier said it would investigate the non-compete fees worth $75 million paid by Diageo to Mallya under the takeover regulations.

The valuation of traditional sorghum beer business in South Africa was not made public either by Diageo or Mallya, leading to speculation that the sale of USL transaction and the sale of traditional beer business by Mallya-owned United National Breweries (UNB) are linked. Corporate lawyers said it would be difficult for Sebi to link the South Africa and USL transaction owing to jurisdiction issues and transaction across various locations.

The UNB transaction gave Diageo control of the leading sorghum beer business in South Africa. "Our evaluation process for any such transaction is rigorous but confidential. We have received a request for information from Sebi and will of course cooperate with them, as we would with any government agency," said a Diageo spokesperson.

Sebi rules currently bar giving any premium to the promoter of a company at takeover. "More than Mallya, it will be Diageo which will be under pressure. Sebi can ask it to revise the open offer if it finds that non-compete fees flout the takeover code," said a corporate lawyer.

A mail sent to Diageo did not elicit any response, while a UB group spokesperson declined to comment.

In January this year, Diageo had said it would run the traditional beer business separately for now as the sorghum business provides it with an entry point into the segment of South Africa. Sorghum beer will continue to exist as a separate segment in the beer market, and will be an important part of South African beer landscape, the company had said in a conference call with investors in January this year.

The acquisition of South African Breweries' traditional beer business by Diageo is part of a complex web of transactions signed by the British firm with Mallya. Apart from the sale of South African business and paying non-compete fees, Diageo also paid off a $141-million loan to Standard Chartered Bank taken by Watson Ltd, a UB group company. It also paid off another $41-million loan taken by United Breweries Overseas Ltd.

In India, United Spirits - under Diageo - has written off dues worth Rs 2,100 crore. Diageo has also agreed to sponsor Mallya's Force 1 Formula One race team for $15 million per season.

SWEET DEAL

• Nov 2012: Diageo buys USL from Mallya at $2.1 bn
   
• Jan 2013: Diageo buys 50% traditional beer business in South Africa for $36 mn
   
• Apr 2015: Diageo buys rest of South African business for $27 mn and $14 mn as earn out payment
   
• Feb 2016: Diageo agrees to pay $75 mn to Mallya as non-compete fees; Diageo pays off $141 mn loan of Watson Ltd of UB group; Diageo pays off $41-mn loan of UB Offshore, USL writes off Rs 2100 cr dues from UB entities, Mallya gets ROFR to buy 13 prime properties in India
  

 

Mar 2016: ED, CBI, Sebi start probe into Mallya-Diageo transactions