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In 2007, Vijay Mallya-led United Spirits Ltd (USL) acquired Whyte & Mackay (W&M) with a view to tap the lucrative Scotch market, increase its presence in the liquor market and secure its supply of Scotch to fuel its own brands.
Fast forward to 2013 - the Scotch market is still the most attractive in the segment, W&M still gives USL a brand to establish its presence in Europe, but Diageo has offered to part with most of USL's wholly-owned subsidiary W&M to allay competition concerns of a regulatory body.
As part of the remedy, Diageo has offered to sell most of W&M's core assets but has asked to keep the malt distilleries - the Dalmore and Tamnavulin distilleries . If USL gets to retain its control over the distilleries, it will also hold the Dalmore and Tamnavulin single malt Scotch whisky brands. W&M's Invergordon, Jura and Fettercairn distilleries and all of W&M's central operations, will be sold to a buyer approved by the UK Office of Fair Trade.
The two distilleries that USL will get to maintain account for combined malt capacity of 9 million litres per annum. This will secure the requisite supply for its Black Dog brand of blended whisky and Dalmore and Tamnavulin brands ..
About 10 million litres of malt capacity (in two distilleries) and 38 million litres of grain capacity (in one distillery) will be lost in the three distilleries that Diageo has offered to part with.
When Mallya purchased the brand in 2007, the company had not only given the liquor baron a presence in the European liquor market that had never extended a warm reception to Indian whisky, saying it was made of molasses (not grain) and hence should not be called 'whisky'. The buy also got United Spirits membership in the Scotch and Whisky Association (SWA) with which it had been at loggerheads for about a decade. The SWA is a powerful agency of lobbyists that protect the interests of Scotch producers.
But in hindsight, the purchase of W&M brought little benefit to USL. At the time of the purchase, Diageo was a large buyer from the W&M distilleries and was thus contributing to a large share of the company's revenue. However, that contract expired a few months later. W&M now brings in about £ 200 million of annual revenue, of which about £40-50 million come from bulk deals to other players like Tesco.
The deal then left USL with a large Rs 8,500 crore debt on its balance sheet and the company's bottomline started limping due to a sharp spike in finance costs. Analysts and industry observers say the sale of W&M will help reduce USL's nearly Rs 7,000 crore debt to some extent.
"We see this as positive development which will sharply reduce debt and lead to significant interest cost savings (interest caused 50 per cent EBIT erosion in Q2FY14)," says analyst Abneesh Roy of Edelweiss Securities.
Impact on Diageo
Diageo too has little to lose in W&M as the company already owns 28 malt distilleries and one grain distillery. Besides, W&M brands also score low in the premium segment that Diageo has been channelling all its energy towards.
"W&M would probably be better outside their portfolio than inside because Diageo has so many brands, it may never have given W&M much attention.," according to Val Smith, Chairman of International Wines and Spirits Research.
While the value segment represents approximately 28 million cases globally, Diageo has focused its energy on the premium segments of the category. In fiscal 2013, Scotch made up 23 per cent of Diageo volumes, 28 per cent of net sales and 35 per cent of its gross profit. Scotch earns higher net sales per case compared to other categories in Diageo, hence resulting in higher margins. "So, effectively, if we grow Scotch, we grow Diageo," David Gates, Director, Premium Core Spirits at Diageo said.
The W&M portfolio is seen as a mass brand owing to its presence in hypermarkets and supermarkets in Britain. "In Scotland, consumers like it a little more, but it's certainly not very big anywhere," IWSR's Smith says.
Diageo on the other hand, enjoys a much superior brand legacy and records about £3.2bn of net sales across over 140 countries, in the Scotch segment. The Johnnie Walker label is the world's largest selling Scotch whisky with volumes of about 18 million cases in 2012, more than the combined value of the next three biggest-selling Scotch brands - Ballantines and Chivas Regal (Pernod Ricard) and Grants.
W&M ranks 29th on the list of most consumed Scotch, registering sale of about 600,000 cases in 2012. Mallya had purchased the Glasgow-based distiller from Vivian Immerman and his brother-in-law, Robert Tchenguiz. The duo had taken full control of W&M during 2005 and relaunched the brand with its double-lion symbol in 2006. The W&M line consists of its namesake brand, the Dalmore and Jura Scotch brands as well as Vladivar vodka and Glayva liqueur.
