Diageo makes irresistible open offer to United Spirits share holders

MUMBAI: Diageo plc  has launched a tender offer to the public shareholders of United Spirits Limited (“USL”) to acquire up to 37,785,214 shares in USL, which represents 26% of USL's fully diluted issued share capital as at 15 April 2014 (the “Tender Offer”).  The Tender Offer will be at a price of INR 3,030 per share and the total consideration for the increased stake (assuming take-up in full at the announced price) will be INR 114,489,198,420 (approximately £1,132,458,720).Diageo has launched the Tender Offer through Relay B.V. (“Relay”), a wholly-owned indirect subsidiary of Diageo.Relaycurrently holds 28.78% of the issued share capital of USL,acquired for a total investment of INR 65,742,163,642(£726,550,972). On completion of the Tender Offer (assuming full take-up), Relay will hold 54.78% of USL’s issued share capital and will have paid approximately INR 180,231,362,062(£1,859,009,692) for its total shareholding in USL.

In the event the Tender Offer is subscribed in full, the total consideration payable at the announced price for Diageo’s increased stake will represent a 38x multiple of USL’s EBITDA on a consolidated basis for the year ended 31 March 2013 andDiageo's total investment, of INR 180,231,362,062 (£1,859,009,692), in USL is expected to be EP positive in FY2022, the 7th full financial year after completion(assuming a12 % WACC) and EPSaccretive in the year ended 30 June 2016.

Important information:

The important information set out below comprises information regarding:

•             USL

•             The Tender Offer, including its timing

•             The Shareholders’ Agreement

•             Other important information

•             Status of proceedings in respect of the earlier USL Transaction

USL

USL is the leading spirits producer in India.On a consolidated basis, in the financial year ended 31 March 2013, USL earned net revenue of INR 105,980 million (£1,048.3 million) from operations, EBITDA of INR 13,548 million (£134.0 million) and losses after tax of INR 1,050 million(£10.4 million). USL had INR 163,849 million (£1,621 million) of total assets on a consolidated basis as at 31 March 2013.

Tender Offer

The Tender Offer will be governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the "Regulations") and applicable law. The applicable Indian takeover regulator is the Securities and Exchange Board of India ("SEBI").

The Tender Offer will be made in accordance with the Regulations and on the terms and conditions set out in the public announcement made today in India and the detailed public statement and letter of offer that are to be released by Diageo and Relay in India.Diageoand Relayhave obtained the required competition approvals, and the completion of the Tender Offer is not conditional on receipt of any competition approvals in India or elsewhere.

The Tender Offer has been announced at the following price:

for each USL Share

INR 3,030 in cash

That price represents a premium of:

·         22.5% to the price at which Diageo last acquired USL shares on 31 January 2014; and

·         20.0% to the 60 day VWAP for USL (SEBI regulatory floor price).

Diageo will fund the consideration payable under the Tender Offer through existing cash resources and debt.

The Tender Offer is not subject to any condition regarding levels of acceptance.  Accordingly, if the Tender Offer is not subscribed in full, all USL shares tendered would, subject to the terms and conditions of the Tender Offer, be acquired by Relay. If the Tender Offer is over-subscribed, the tenderingUSL shareholders will be scaled back and entitled to sell such number of shares calculated on a pro rata basis to the shares tendered in the Tender Offer.

Further important information relating to the Tender Offer, and certain implications of the SEBI review process required to confirm its terms and conditions (including price), are set out in the “Other Important Information” section below.

Indicative Abridged Tender Offer Timetable (see note)

Public announcement	15 April 2014
Expected publication of the detailed public statement	By 23 April 2014
Expected dispatch of the letter of offer	On or around 4 June 2014
Commencement of tendering period	On or around 11 June 2014
Expiry of tendering period	On or around 24 June 2014
Settlement of consideration for accepting USL shareholders	On or around 8 July 2014

Note: The times and dates set out in the indicative abridged timetable above and mentioned throughout this announcement may be subject to adjustment, being dependent on the timing of the completion of the review process of the draft letter of offer by SEBI, regulatory approvals in India if required, and other permitted conditions to the Tender Offer. Details of any such adjustment and the new times and dates will be notified to USL shareholders by publication in relevant newspapers and will be announced on relevant stock exchanges. The times and dates are subject to the satisfaction or waiver of all applicable conditions to the Tender Offer and completion of the SEBI review process.

Shareholders’ Agreement

The shareholders’ agreement entered into on 9 November 2012 between Diageo, Relay, United Breweries (Holdings) Limited (“UBHL”) (holder of 5.93% of USL’s issued share capital as of 31 March 2014) and Kingfisher Finvest India Limited (a subsidiary of UBHL – “KFIL”)) (holder of 3.58% of USL’s issued share capital as of 4 April 2014 per a filing made by KFIL) and which took effect on 4 July 2013 as part of Diageo’s original investment in USL (the “Shareholders’ Agreement”) will remain in force following, and (other than as described below) will be unaffected by, completion of the Tender Offer.

Pursuant to the terms of the Shareholders’ Agreement, members of the UBHL group which hold USL shares are currently obliged to vote their shares at Relay’s direction.  In the event that the Tender Offer is fully subscribed such that Diageo holds, indirectly, a majority of the shares in USL, this obligation will cease.  In the event Diageo does not secure a majority of the shares in USL by virtue of the Tender Offer, the obligation on members of the UBHL group to vote their USL shares at Relay’s direction will remain in force until the earlier of the Diageo group reaching a majority position in USL and the end of the fourth full financial year of Diageo after 1 July 2014.

Other Important Information

The Tender Offer is being made under Regulation 3(2) of the Regulations, which when read together with Regulation 7(1) requires Diageo to make a minimum offer for 26% of the total shares of USL. The Tender Offer is being made in compliance with the Regulations which came into effect in October 2011, and have been further amended, including amendments made in May 2012 and March 2013.  The Regulations substantially changed the regulatory environment applicable to tender offers in India.

The terms, conditions, timetable and public documentation in relation to the Tender Offer, and the making of the Tender Offer itself, are subject to review and observations issued by SEBI.  SEBI may require changes to be made to the terms (including price), conditions, timetable, implementation and public documentation in relation to the Tender Offer and Relay would be obliged to implement such changes (subject to a right of appeal).

There is limited precedent as to how these rules might be interpreted and the nature of the observations and directions that SEBI might issue pursuant to the Regulations, both generally and specifically in relation to the terms of the Tender Offer.

Having carefully considered the Regulations and their application to the Tender Offer, Diageo believes that the terms, conditions and offer price of the Tender Offer announced today are the terms, conditions and offer price that, under the Regulations, should apply in respect of the Tender Offer.  However, it is possible that SEBI may require the terms and conditions of the Tender Offer (including price) to be modified, and it is possible that any such modifications could be material.  Prior to the commencement of the formal SEBI review process and dispatch of the letter of offer for the Tender Offer, it is not possible to assess more definitively the likelihood, effect or amount of any such potential modifications that SEBI might require.

Status of proceedings in respect of the earlier USL Transaction

As previously announced on 30 January 2014 in connection with the publication of Diageo’s interim results for the six months ended 31 December 2014, on 4 July 2013 Diageo completed its acquisition, under a share purchase agreement with various sellers (the “SPA”) of 21,767,749 shares (14.98%) in USL at a price of INR 1440 per share and for total consideration of INR 31.3 billion (£342 million), including 10,141,437 shares (6.98%) from UBHL (the “UBHL Share Sale”).

At the time of the acquisition from UBHL on 4 July 2013, the High Court of Karnataka (the “High Court”) had granted leave under sections 536 and 537 of the Indian Companies Act (the “Leave Order”) to enable the UBHL Share Sale to take place notwithstanding the continued existence of five winding-up petitions (the “Original Petitions”) that were pending against UBHL on 9 November 2012, being the date of the SPA. Additional winding-up petitions have been brought against UBHL since 9 November 2012, and the Leave Order did not extend to them. At the time of the completion of the UBHL Share Sale, the Leave Order remained subject to review on appeal. However, as stated by Diageo at the time of closing on 4 July 2013, it was considered unlikely that any appeal process in respect of the Leave Order would definitively conclude on a timely basis and, accordingly, Diageo waived the conditionality under the SPA relating to the absence of insolvency proceedings in relation to UBHL and acquired the 10,141,437 USL shares from UBHL at that time. 

Following closing of the UBHL Share Sale, appeals were filed by various petitioners in respect of the Leave Order. The Appellate Division of the High Court of Karnataka (the “Appeal Court”) gave its decision in respect of those appeals on 20 December 2013 (the “20 December Order”) in which it set aside the Leave Order.

Diageo and Relay have since filed petitions for special leave to appeal against the 20 December Order before the Supreme Court of India.  On 10 February 2014, the Supreme Court of India issued an order, inter alia, admitting the petitions and ordering that the status quo be maintained in respect of the UBHL Share Sale notwithstanding the 20 December Order.  The appeal hearing before the Supreme Court of India is currently listed to be heard on 28 April 2014.

In separate proceedings, various winding-up petitions against UBHL have been progressing in the High Court since closing of the UBHL Share Sale, with the next hearing date anticipated to be sometime in June 2014. In separate rulings issued by the High Court on 22 November 2013 and 13 December 2013, the High Court has admitted two of the winding-up petitions against UBHL. An appeal filed by UBHL against the first ruling issued on 22 November 2013 was dismissed by a division bench of the High Court on 16 December 2013, which is now the subject of a further appeal by UBHL before the Supreme Court of India. On 6 February 2014, UBHL filed an appeal before the High Court against the second ruling issued on 13 December 2013, which appeal is currently pending.

Diageo continues to believe that the acquisition price of INR 1440 paid to UBHL for the USL shares in the UBHL Share Sale is fair and reasonable as regards UBHL, UBHL's shareholders and UBHL's secured and unsecured creditors. However, adverse results for Diageo in the proceedings referred to above could, absent leave or relief in other proceedings, ultimately result in Diageo losing title to the 10,141,437 USL shares acquired from UBHL. There can be no certainty as to the outcome of the existing or any further related legal proceedings or the timeframe within which they would be concluded.

Separately, Diageo continues to pursue completion of the acquisition of an additional 3,459,090 USL shares (representing approximately 2.38% of the share capital of USL) under the SPA from the USL Benefit Trust. Currently certain lenders to USL are refusing to release security that they hold over those shares notwithstanding that they have been repaid in full. USL is taking steps, including proceedings before the High Court, to expedite the release of the security. As previously disclosed, if it is not ultimately possible to complete the acquisition in relation to these shares, they would instead continue to be held by the USL Benefit Trust subject to an undertaking that the trustees would only vote the shares at the direction of USL.