Diageo is paying up to end a long Indian hangover. The world's biggest spirits maker will hand Vijay Mallya $75 million over five years to step down as chairman of Indian subsidiary United Spirits, the maker of McDowell's and Signature whiskies. It will also pay the same again to sponsor Force India, a Formula One team part-owned by the liquor baron. It ends an acrimonious dispute and further increases the cost of Diageo's big Indian adventure.
The London-listed owner of Smirnoff and Tanqueray, which owns about 55 per cent of United Spirits, had been trying to oust Mallya for months after an internal inquiry found what it said were financial irregularities in United Spirits' accounts in recent years. Mallya always denied the allegations.
A shareholders' agreement meant that Diageo's hands were tied. It was unable to remove Mallya as chairman as long as the tycoon held a small shareholding. That was just part of a broader agreement Diageo signed in 2012 to take control of the distiller in stages. The gamble is a long-term bet on a company which sells over 120 million cases of liquor a year in a growing economy with a rising middle class.
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The divorce is expensive, however. Although the F1 sponsorship will bring some benefits, the total outlay amounts to around five per cent of the nearly $3 billion that Diageo has already spent on United Spirits. Diageo was already paying a high price, including a heady multiple of 38 times historic Ebitda in the most recent large tender offer. Diageo itself is trading on only 17 times. Global rivals like Pernod Ricard currently trade at 14 times.
This is not the first time that a blue-chip company has run into difficulties teaming up with emerging-market tycoons. For example, BP's Russian joint venture with four Soviet-born billionaires, TNK-BP, proved tricky, even if ultimately lucrative for the British oil giant. Diageo offers another reminder that such partnerships can turn sour.
