Guzzling competition

The main talking point of the open offer announced by the UB group for 25 per cent of Shaw Wallace is whether it is""or is not""a hostile bid.

UB group chairman Vijay Mallya seems to think it isn't, since Shaw Wallace had earlier invited bids for its liquor business. If the intention was to sell anyway, why shoo away someone who wants to buy? The Shaw Wallace group clearly disagrees.

A company spokesman pointed out that since the UB bid did not have the support of either the promoters or the management of Shaw Wallace, it cannot but be termed hostile.

A common sense interpretation of the UB gambit should indeed place it in the category of a non-friendly, unsolicited open offer.

However, the real issue is not the nature of the bid but the consequences if it succeeds. In any industry, customer interest is best served when there is competition.

The Indian spirits marketplace does not lack for competitors right now, but when the No 1 player has designs on No 2, one has to sit up and take note.

In countries with a strong regulatory regime, mergers (or significant stake acquisitions) involving the top two players will always be scrutinised closely.

If at all they are allowed, it would be because the second player is in deep financial trouble. Even so, the deal would not go through without stringent riders to reduce the monopoly powers of the combined entity.

In the UB-Shaw Wallace case, the latter is certainly not its last legs. It may be on sale, but that is not the same thing as saying it needs to be bought out by the industry leader.

In some sectors, it may be fair to argue that being a domestic monopoly is no great shakes when Indian companies are minnows in the global ocean.

Once import tariffs and other barriers are lowered, even the domestic leader may not find the going easy against well-funded foreign competitors.

However, the liquor industry cannot easily be opened up to competition in the short run. With tariffs prohibitive, advertising banned and liquor licences not easy to come by, the playing field clearly favours established companies with entrenched distribution networks.

Brand building is not easy, and breaking into retail distribution is a giant task. Quite simply, competition ain't gonna happen in liquor for quite a while, even after the welcome mat is laid out for foreign players.

With no competition regulator in place, the UB bid will be scrutinised by Sebi and the department of company affairs, neither of which is authorised to look at this crucial aspect of M&A.

With Shaw Wallace's promoters holding 55 per cent of the equity, the UB bid cannot result in a takeover without their consent. However, the bid can deter potential competitors by threatening to tie up the matter in courts for some time to come.

For his part, Mr Mallya says that he made his move after waiting in vain for a decision on the earlier bid for Shaw Wallace's liquor business.

After calling for bids, Shaw Wallace has been chary about announcing a winner, no doubt because of worries about who may actually win. But whether the liquor business is sold separately or as part of the whole bundle, the policy-maker's primary focus ought to be on its effects on competition.