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Diageo Plans New Offer for United Spirits

LONDON (The Deal) -- British drinks group Diageo (DEO) on Tuesday launched a bid for majority control of India's United Spirits that would value the company's entire share capital at 440.34 billion rupees ($7.3 billion).

The Rs114.49 billion, or Rs3,030-per-share, offer for up to 26% of United Spirits could lift Diageo's stake from almost 29% to close to 55% and comes a little over a year after a lower offer by Diageo garned just 0.04% of United Spirits.

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That previoius offer was linked to a deal Diageo forged with Indian tycoon Vijay Mallya's troubled United Breweries Holdings Ltd. and associated companies in November 2012. Diageo has already paid out Rs65.7 billion for its 29% United Spirits holding.

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The offer comes as the 400 million pounds ($670 million) auction of United Spirits' Scotch whisky business Whyte & Mackay Ltd. enters its final round. Among possible bidders ahead of the April 17 deadline, are private equity firm Lion Capital LLP, which has teamed up with former Whyte & Mackay CEO John Beard to front its approach, as well as Kohlberg Kravis Roberts & Co. LP and TPG Capital. Media reports have also mentioned Thai Beverage PCL, Italy's Davide Campari-Milano SpA and Russian-backed SPI Group Sarl, the maker of Stolichnaya Vodka.

Diageo, which agreed to put the U.K.-based distiller up for sale to get regulatory agreement for its previous United Spirits deal, brought in Rothschild, Rabobank NV and Standard Chartered Bank plc last year to handle the auction.

Despite the failure of its January 2013 general offer to United Spirits' shareholders, Diageo is required to make a second general offer for a minimum of 26% of the Bombay-listed distiller under the Indian takeover code. Diageo said revisions to the code over the past two years had "substantially changed the regulatory environment applicable to tender offers" in the country. Its latest offer will run for two weeks in June and represents a premium of 22.5% to the price at which Diageo last acquired United Spirits shares on Jan 31. The Rs3,030 price is more than double its January 2013 bid.

But Diageo's original November 2012 agreement to acquire a 14.98% stake in United Spirits is still the subject of legal wrangling. Diageo agreed to pay Rs1,440 per share for the stake, subscribe to a capital increase for a further 10% of United Spirits' shares and then launch a general offer for a further 26% at the same price.

That deal closed in July last year. But even in 2012, United Breweries was already appealing against winding up orders brought as a result of a failure to repay its creditors. More winding up orders have been brought against it since and are still making their way through the courts. And while most of Diageo's shareholding comes from affiliates and subsidiaries and are not in dispute, the London company admits that it may ultimately lose title to the 6.98% of the shares bought directly from United Breweries.

Diageo said on Tuesday that it continues to believe the acquisition price of Rs1,440 is fair and reasonable to United Breweries, its shareholders and its secured and unsecured creditors. But it said that court proceedings and a review of the new general offer by the Indian regulator make the situation uncertain, noting that it may not get the full 26%. More frustrating still, it has been forced to pursue the release of a further 2.38% of the shares from the original agreement through the courts. According to Diageo, the creditors of the United Spirits Benefit Trust continue to hold a security over these shares, even though they have been repaid in full.

If Diageo ends up with less than majority control, for whatever reason, Diageo expects that United Breweries and others who retained minority holdings under the 2012 agreement will continue to vote at its direction for another four years. It also hopes that the Benefit Trust creditors will at least agree to vote the same way, if they cannot be persuaded to release the shares.

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