Heineken buys Mallya's 15% stake to take control of United Breweries

World's second-largest beer company pays Rs 5,825 cr to lenders for Mallya's share; stake consolidation, demand recovery positive for beer leader

Heineken, the second largest beer company in the world, increased its stake in United Breweries (UBL) to 61.5 per cent on Wednesday. The Dutch parent of UBL, which had 45 per cent stake prior to today’s transaction, bought the 14.99 per cent stake worth about Rs 5,825 crore held by the Debt Recovery Tribunal.

Given that Heineken received an exemption from making an open offer, it could also acquire the balance 11 per cent UB group stake pledged with banks through the same route. If this goes through, Heineken’s stake in UBL, which has a 50 per cent share in India’s beer market, will cross the 72 per cent mark.

These shares were earlier owned by UB group chairman, Vijay Mallya who fled India after defaulting on bank loans taken by his now closed airline – Kingfisher Airlines. After Mallya escaped to London – leaving unpaid bills of thousands of employees, vendors and lenders – the Enforcement Directorate attached his properties including his stake in Indian companies. The Indian lenders had made claims worth Rs 9,000 crore against the airline. The ED transferred the shares to the lenders after the PMLA Court ordered the agency in May last week.

The PMLA court, however, said in case Mallya is found innocent later, the banks will have to restore the properties back to Mallya after recovering their dues.

Meanwhile, the latest stake purchase will help Heineken to consolidate its market share in India through UBL and offer additional products to the Indian consumers.

The street perceives this as a positive with Emkay Global Research’s Ashit Desai highlighting that the increase in ownership may drive higher involvement and support from Heineken. However, he doesn’t see material benefits in the medium term as the company is run efficiently with market leadership, stronger profitability and access to Heineken’s portfolio.

Credit Suisse, however, believes that full control for Heineken would mean more focus on improving mix and profitability at UBL. Say Arnab Mitra and Pratik Rangnekar of the foreign firm, “Once Heineken takes full control of the business, we expect greater focus on premiumisation with brands like Amstel and Heineken Silver, and on cost efficiencies to improve operating profit margins.” Amstel, which has a presence in 10 states, has gained market share in the March quarter. Moreover, the premium portfolio (Heineken Silver, Ultra Witbier, Amstel) has grown ahead of the overall portfolio in the quarter.

In addition to the stake consolidation, volume recovery and margin gains will be key triggers for the stock which shed 3.7 per cent in trade on Wednesday after scaling a new high of Rs 1,497.65 in intra-day trades. The company’s volumes grew 8 per cent in the March quarter after five consecutive quarters of year-on-year decline with the total number of cases crossing the 40 million mark. The volume growth in the quarter was led by most markets barring Telangana, Odisha and Delhi. Desai of Emkay Global Research expects a faster recovery than the first lockdown given benign taxation, earlier reopening of on-premise trade (bars, pubs, restaurants) and ongoing vaccination.

Given the higher input costs, the street will keep an eye out on margin trends. While gross margins were below expectations in the March quarter, tight control on costs helped the company post a strong 16.9 per cent operating profit margin. While glass prices are stable and availability should improve post lockdown, barley prices continue to remain high. This could impact margins in the June quarter as recovery was cut short mid-way by the second wave.

The stock is up 14 per cent since the start of May and is valued at 47 times its FY23 earnings estimates. These gains along with the market regulator Sebi on Tuesday exempting Heineken International from making an open offer to the shareholders of UBL for its additional stake purchase can be attributed to Wednesday’s correction.

Given the low levels of consumption, expectations of market share gain from spirits, lower tax rates (Haryana, West Bengal and Uttar Pradesh) and premiumisation, most brokerages are positive on long term growth prospects. Investors can consider the stock on further corrections.