For obvious reasons, there may not be any takers for Diageo Plc’s open offer to United Spirits (USL) shareholders as the current share price is at Rs 1,755.50 while the offer price is at Rs 1,440.

A few scenarios emerge out of such a situation:

USL shareholders would want to hold on to the shares as at a future date they will in fact become Diageo’s shareholders.

Diageo Plc may have to go back to its board to get its nod to increase the price of open offer or buy from the market to increase its shareholding.

It would mean paying a far higher price for acquiring USL than what it set out to do in November when the deal was signed. According to the agreement, by mopping up all the shares from the open offer (26 per cent), the total outgo would have been Rs 5,441 crore (£625 million).

Diageo may be satisfied with the 27.4 per cent stake it gets directly from United Spirits as it would still control the management instead of putting a lot more money on the table to buy another 26 per cent.

According to the agreement, if the preferential allotment and the tender offer do not result in Diageo owning a majority stake in USL, the United Breweries Holdings Ltd (UBHL) has agreed to vote with its remaining shareholding in USL as directed by Diageo for a four-year period. UBHL will also vote its USL shares to enable Diageo to ensure that its nominees are appointed to the USL board.

Also, if Diageo does not acquire a majority stake, its minimum shareholding of 25.1 per cent along with the voting and other governance procedures as agreed with the UB Group and its ties with Mallya as Chairman of USL, would enable Diageo to include the balance sheet of USL in its consolidated accounts.

Angel Broking consultant Sharan Lalane said that there is every chance that the open offer might fail but whether Diageo would mop up further shares from the market or revise the offer price remains to be seen.

Another analyst, Kishor Ostwal, felt that no one will sell their shares to Diageo as even SBI, with the largest exposure to Kingfisher Airlines among all banks, was selling UB Group shares pledged with it in the open market at a 25-30 per cent premium to the open offer.

“Also, those who surrender (their shares) in (open) offer will have to pay 20 per cent tax on profit,” he pointed out. Hence, there was little possibility of the open offer being successful unless the price comes crashing down to around Rs 1,440 when the offer opens on April 10, the analyst said.

Read also: Diageo open offer to United Spirits shareholders begins on April 10

(This article was published on April 5, 2013)
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