The Hindu Business Line : The numbers game

Towards the end of January this year certain reports suggested that the acquisition was just a few weeks away as the due diligence of the company was about to be completed. Immerman himself confirmed to this newspaper that a deal was round the corner. But the deal did not go through so soon as differences over valuations surfaced. Mallya stated at a news conference in Shanghai days before the actual deal was signed that Whyte & Mackay had asked for £700 million and he had not decided whether he was willing to pay up that money. He merely stated that a decision would be made in two weeks. But five days after making such an announcement, he flew down to Glasgow in Scotland to announce at a press conference that he had acquired Whyte & Mackay for £595 million. What became clear later was that Mallya's crack team was all along working closely with Whyte & Mackay and after several rounds of hard bargaining, it had finally swung the deal. Immerman acknowledged later at a press conference held to announce the deal that "with the UB Group's ability to sell and market brands, Whyte & Mackay will be taken to a new level again. This is now a great company and is going to a great home."

The wait is finally over, as Nikhil Vora, Partner with investment banking and brokerage firm SSKI Securities, would say in his report a day after the deal was signed. "We have always liked United Spirits' business and believe that the acquisition only enhances the abilities of the company to take a shot at becoming a global leader in the space," he said in his report.

But analysts believe that just because United Spirits will now be able to access the inventory of 115 million litres of Scotch whisky worth about £380 million, it does not necessarily mean that the company's balance sheet will not be affected. "For United Spirits, a $1.2-billion acquisition is clearly going to strain its balance sheet in the near term," said Vora said in his report.

According to the Citigroup report, while on a near-term basis, the valuations do not seem cheap, they do reflect a scarcity premium on Scotch assets. There are not too many available acquisition options, especially in the context of the large size of Whyte & Mackay's Scotch inventory. There are also environmental issues to contend with as, according to some reports, the administration in Scotland does not permit setting up of more distilleries and hence, at least for the medium term, Scotch will always be in short supply.

While consumption of Scotch in Europe has either declined or remains the same, demand in Asia is driving up the prices of Scotch. According to Singh and Khadse, rising incomes and preference for high-end brands are driving 30 per cent growth in Scotch whisky demand in India compared with the overall liquor market growth of 12 per cent.

This demand is likely to be sustained because of the demographic profile of the population with 50 per cent of them below 25 years, the Citigroup report said. United Spirits is also preparing for the onslaught from foreign liquor companies as import duties are expected to be reduced next year and hence this acquisition will help it consolidate itself before the competition hits the company.

The acquisition gives Mallya a 9 per cent market share right away. India and other Asian markets are doing extremely well whereas in Europe they are declining. India is the largest consumer of whisky at about 70 million cases and UB sees ample scope to grow the market for Scotch in India.

As officials of United Spirits begin to take possession of Whyte & Mackay in the next few weeks, the global liquor industry leaders will surely not want to miss out on Mallya's next move, lest their own companies come on to his radar, which, according to industry watchers, may be sooner than anticipated.

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