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Perspective

Not so neat but hardly on the rocks
Diageo's United Spirits play may have been far from smooth but their gumption will eventually get them high

Rajesh Padmashali

Nobody said it was going to be easy but it has been more than two years since Diageo first announced that it was stepping in as a white knight for United Spirits. The acquisition was surely driven by the lure of getting a foothold and distribution depth in a very ‘willing and able to get drunk’ market. Consumption of alcoholic beverages is directly proportional to the ‘demographic dividend’ that we dream about reinvesting. Eventually if the dividend turns out to be a nightmare, we will still need it to humour all those hooligans up for hire. So, while the acquisition was a sober business call, the Diageo management seems to have burnt its fish and chips during due diligence.

Their eagerness to rush through a stake hike after getting an okay from a single judge bench did take some sheen off their MNC credentials. If not poor due diligence, it implied too much reliance on the local promoter, Vijay Mallya from whose company (UBHL) the contentious stake was bought. Many creditors already had a winding up petition against UBHL for unpaid dues but the Diageo honchos might have believed that the word of law works here as well as it does back home. And they might have found it hard to believe that one judge’s word is not as good as the other. Lesson learnt by the Diageo management after the annulment of its purchase of United Spirits shares 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.”

Now, as a matter of prudence, they are also preparing themselves for a worst-case scenario of their appeal not standing scrutiny. That being the case, before the ink on that judgement dries, Diageo's lawyers will have more reason to make merry as they work on a possible way out. Of course, the parent's stock price may take a knock as not only is more than £300 million worth of USL stock at stake, it will have to possibly pay closer to market price to the UBHL creditors who are behaving like the dog in the manger.

What Diageo distills is used to celebrate and/or drown a few sorrows. Right now, Diageo itself would like to put behind one. The only source of solace would be that the stock currently trades at ₹3,260, fairly above its average acquisition price. After having paid top sterling, the Diageo management might not have expected a slip between the glass and the lip. While caveat emptor always applies, it also says much about our intention of becoming the 'easiest' place to do business. Otherwise, what explains a court judgement in one's favour while there are pending creditors? What purpose does a single bench ruling serve and what message does it does send to potential investors? Diageo itself is not some local Scottish pub. If someone of its heft, after investing $3 billion has to endure this legal farce, the others are better off not venturing in.

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