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The proposed transaction worth about $2 billion would provide much needed cash for Mallya's UB group, whose aviation venture Kingfisher Airlines is facing turbulent times.
Under the deal, Diageo would acquire up to 53.4% stake in United Spirits, one of the largest spirits firm, within five years.
Approving the deal, Competition Commission of India (CCI) in an order dated February 26 said the proposed combination is not likely to have an appreciable adverse effect on competition in India.
The Commission noted that United Spirits and Diageo are mostly present in different price spectrums in the branded spirits market with negligible overlap between their products in each of the branded spirits segment.
"... The proposed combination may bring new products and more variants of the existing brands at different price points which would ultimately enable the consumer to expand his choice set," it said.
Relay B V, an indirect wholly-owned subsidiary of Diageo Plc, and United Spirits had submitted a notice to the fair trade regulator seeking nod for proposed acquisition of shares and control of United Spirits. The notice was given on December 5, 2012, and later, the Commission had sought clarifications from both parties quite a few times.
According to the companies, the proposed combination would help Diageo to effectively participate in India's large and rapidly growing spirits market.
"It has also been stated in the notice that the proposed combination provides an opportunity to Diageo to premiumise the existing brands and innovate from United Spirit's trademarks, which would also result in a huge change in Diageo's emerging market global footprint," the order said.
The Commission also said that Diageo's acquisition of United Spirits may give a boost to the premiumisation strategy.
"New premium brands of the established brands (brand proliferation) and new premium brands (brand extension), are likely to be introduced in the market for spirits. The degree of product differentiation across price segments is likely to increase in the post combination scenario," the order said.
As part of the deal, Diageo would acquire 27.4% stake for Rs 5,725.4 crore through a combination of share purchase from existing promoters and preferential allotment of shares. In addition, it had offered to acquire an additional 26% stake for Rs 5,441.07 crore through an open offer for public shareholders.
