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United Spirits Ltd (USPL) to Diageo suffered a setback on Friday with the Karnataka High Court annulling it in response to a winding-up petition by the creditors of the holding company United Breweries (Holdings) Ltd or UBHL.
The development comes nearly five months after Diageo completed the transaction, acquiring a majority stake in USL.
Friday’s order has annulled the 6.97% stake sold by UBHL to Diageo as it had given a corporate guarantee to the creditors of Kingfisher Airlines. The fate of these shares would now be decided once the court disposes of the winding-up petitions against UBHL.
Diageo, which owns premium liquor brands like Johnnie Walker Scotch whisky and Smirnoff vodka, had become the single largest shareholder in USL, having spent around Rs 5,707 crore to acquire the 26.37% stake it currently holds.
In November 2012 Diageo had agreed to acquire a 27.4% stake in USL for Rs 5,725 crore by paying Rs 1,440 per share. Of this 27.4%, 19.3% was by acquiring a direct stake from UBHL and some USL subsidiaries and group trusts. The balance was to come through a preferential allotment by USL shareholders to Diageo at Rs 1,440 per share of new shares amounting to 10% of the post-issue enlarged share capital of USL.
For the balance 26% stake, Diageo made the mandatory open at R1,440 per share but could muster only 0.04% stake taking its stake to 25.02%. In November, through a block deal it acquired an additional 1.35%, taking its stake to 26.37%. With the HC setting aside the sale made by UBHL, Diageo’s stake drops to 19.4%. UBHL and related promoters currently hold 11.08% in USL.
While setting aside UBHL’s share sale to Diageo, the division bench of the HC set aside the May 24 order of the single-judge company court bench that had granted UBHL permission to sell the shares on the condition that it deposited Rs 250 crore in the court. This was because the company was facing several winding-up petitions filed by creditors of Kingfisher Airlines, claiming to have corporate guarantees. Apart from the Rs 250 crore already deposited, the bench also ordered that Rs 379 crore, the sum remaining from UBHL’s receipts of Rs 1,460.37 crore from its share sale, be deposited in the court. The disbursal of the amounts will be decided by the court after disposal of the petitions, it said.
The UBHL may appeal against the order before the Supreme Court. "We will take all necessary steps to protect Diageo’s interests as well as our own," Mallya said in response to the court’s ruling.
A Diageo spokesperson said, “We are awaiting receipt of the detailed written order of the division bench. We do not believe that there are any grounds for declaring the sale of the 10,141,437 shares in United Spirits Limited purchased by Diageo on July 4, 2013, from United Breweries (Holdings) Limited (UBHL) as void. We are disappointed to hear that the court has over-ruled the previous order of the High Court of Karnataka granting leave to UBHL under sections 536 and 537 of the Indian Companies Act in respect of the five winding up petitions then pending against UBHL to enable the sale of the USL shares by UBHL to take place. We are also disappointed, as a bona fide purchaser for value of the USL shares, that we have been brought into the private dispute between Kingfisher Airlines and its creditors. Once we receive the full written order of the Court of Appeal, we will review the detail of that order. We confirm that we intend to appeal the matter further.”
Analysts maintained that the deal would not come apart as some arrangement is likely to be worked out between Mallya and Diageo. “At its worst this will result in Diageo’s stake coming down in USL. We feel something will be worked out and don’t see any threat to the deal," said V Srinivasan, research analyst at Angel Broking. According to the arrangement between Mallya and Diageo, in the event of the latter not having majority control in USL, UBHL would vote its remaining shareholding in USL as directed by Diageo for a period of four years.
The creditors who moved the appeal before high court included BNP Paribas, Rolls Royce and Partners Finance, RRPF Engine Leasing and IAE International Aero Engines, who were aircraft lessors and financiers to Kingfisher Airlines. The company court had last month admitted two of the winding-up petitions, by French bank BNP Paribas and aircraft manufacturer ATR, and allowed newspapers advertisements to be published.
The USL share closed up 0.97% higher at Rs 2670.55 on the BSE on Friday. The order came after trading hours.