Whyte & Mackay likely thorn in USL-Diageo deal

Anti-trust, monopoly issues could arise in US, UK markets.

Indian billionaire Vijay Mallya’s move to rope in Diageo — the world’s largest spirits firm — as a strategic partner in his flagship firm United Spirits (USL) has hit an anti-trust roadblock. The companies have been in discussions for almost a year to hammer out a deal in which Diageo was expected to pick up a little over 14 per cent stake in USL for around Rs 1,200 crore.

While Diageo continues to maintain it is reviewing a possible collaboration, USL Chairman Vijay Mallya today admitted that lawyers are addressing some anti-trust or monopoly issues. He, however, declined to give details. The USL stock today fell almost 7 per cent to close at Rs 666.55 on the Bombay Stock Exchange.

Sources in USL indicate that the monopoly issues can apply in the US or UK markets if Diageo picks up a stake since it may imply that Diageo will have an indirect holding in the Scotland-based scotch whisky firm Whyte & Mackay, which is wholly owned by USL and which has an absolute majority market share in the European continent. USL acquired Whyte & Mackay in 2007 for around $1.2 billion in a heavily-leveraged move.

Industry analysts also detail that Diageo and USL have large volumes and significant market shares in scotch whisky and vodka segments in their respective markets and an alliance will indeed create a monopoly. “The combined volumes of Diageo and United Spirits in the traditional (scotch whisky) and the youth (vodka) markets will be pretty significant if this deal sails through,” an analyst said, adding that Diageo — which is listed in the US and UK exchanges — has to ensure it does not get into legal wrangles while announcing the deal.

Diageo sells many of its global brands in India and had also formed an equal joint venture with India’s Radico Khaitan in 2006 to market a whisky brand "Masterstroke" that was developed solely for India.

Sources in USL indicate that large deals of this nature take time and involve protracted negotiations on various issues. Citing the example of another deal in which Mallya roped in UK-based Scottish & Newcastle as a strategic investor in his brewing company United Breweries, sources said it was was structured after nearly 18 months of negotiations. Mallya himself had earlier maintained that such deals could not be bound by a time frame.