United Spirits (USL), the largest spirits company and a group firm of Vijay Mallya’s UB Group, has merged Tamil Nadu-based, Rs 500-crore Balaji Distelleries (BDL) into itself in an all-stock deal to strengthen its presence in Tamil Nadu. The merger, valued around Rs 420 crore, will be effective from April 1, 2009.
The board of USL has recommended an issue of two equity shares for every 55 shares held by the promoters of BDL. Earlier this year, Balaji was under the Board for Industrial and Financial Reconstruction (BIFR) because of bad debt.
BDL has a total of 14 crore outstanding shares, which will be converted into USL shares. Given the ratio of 2:55 and USL’s share price of Rs 830, the enterprise valuation of BDL works out to Rs 420 crore. USL stock closed down 3.5 per cent to Rs 820 on Monday, while BDL also closed down 2.5 per cent at Rs 25.8 an equity share on the BSE which itself closed down 2.7 per cent.
Balaji has been a contract manufacturing unit of the UB group since 1983. The company has a distillery and a brewery unit in Tamil Nadu, where it has an annual manufacturing capacity of 10 million cases and 9 million dozens at the brewery.
Commenting on the transaction, UB Group Chairman Vijay Mallya said this merger would de-risk USL’s significant earnings in an important and critical market.
The UB Group sells about 12 million cases each of the spirits and beer in Tamil Nadu, growing at about 15 per cent annually. The state ranks fifth in terms of contributions to USL’s bottomline. Currently, USL has a market share of about 51 per cent in first line brands in the state. The Tamil Nadu market accounts for almost 18 per cent of UB Group’s brewing business and about 19 per cent of its national contribution. BDL accounts for 60 per cent of UB’s beer volumes in the state. UB enjoys 59 per cent market share in the state’s beer market with 73 per cent share in mild segment and 54 per cent share in strong segment.
Tamil Nadu is the only key state where USL does not own a production facility, primarily due to regulatory constraints that prevented setting up of new units, and also transfer of existing licences. The state also does not permit import of products from outside.
The company’s ability to realise full potential in the state has been held back mainly on this account.
