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United Spirit’s recent acquisition of whisky distillery Whyte & Mackay is indicative of how Indian companies are now looking for good deals across a range of sectors internationally. It also shows how active institutions such as ICICI Bank are funding this cross-border deal activity. Andrew Chilvers reports.

When United Spirits, the flagship of India’s UB Group, bought Scottish whisky firm Whyte & Mackay [W&M] for almost £600 million in June, spirits manufacturers the world over were given a wake up call.

Here was a dynamic, acquisitive management team from the sub-continent looking for strategic acquisitions, using a buy-and-build model to create one of the top three spirits makers in the world – and with good reason.

The whisky market in India alone increased by 26% in the year to February making upper-class Indians some of the world’s biggest consumers of scotch. Meanwhile, the WTO is expected to lift the huge tariffs – as high as 550% – on whisky next year, which will result in windfall profits for spirits firms.

Furthermore, the acquisition of the Scottish distillery would create synergies across the group. The company’s bulk scotch inventories of 115 million litres alone would allow United Spirits to expand its operations not only into India, but to other large emerging markets such as Russia and China.

The fundamentals and financials were also sound. W&M owns several distilleries, some of which are the largest in Scotland. The Invergordon Distillery alone produces 40 million litres of whisky a year. The company’s chairman, Vivian Imerman, is considered to be a safe pair of hands and has transformed the business through internationalising its premium brands and maximising the returns from its attractive bulk whisky assets.

W&M recorded sales of £39 million in the past year with an annual operating income of some £50 million, which is predicted to grow by 20% a year. Likewise, revenues are expected to increase by 30% in the current year.

“We have a large and growing business in India and have made recent forays into Russia and China,” says Dr Vijay Mallya, UB Group chairman. “United Spirits has created on of the world’s largest brands of drinks. Until now, the only missing link in our portfolio has been scotch. With W&M we now have a strong portfolio of internationally recognised brands that we will introduce into the Indian market and use our strong distribution muscle to our advantage.”

For UB Group a significant part of the acquisition debt was in the target and had no recourse to United Spirits or the UB Group, so for Mallya it was an attractive deal with a good price tag. The key players in the transaction included UBS and India’s largest private sector banking institution, ICICI Bank, as corporate advisers. ICICI also provided acquisition finance, which again highlights its role as a specialist able to help advise and fund India’s pioneering companies as they look for strategic growth opportunities abroad.

Sonjoy Chatterjee, chief executive and managing director of ICICI Bank UK, says the bank has been a vital partner with acquisitive Indian companies for several years now. For him, the Whyte & Mackay deal was a further indication that businesses from the sub-continent were active in all countries and all sectors.

ICICI has a long relationship with UB Group. In 2005, the bank helped United Spirits acquire Shaw Wallace and Co, the second largest spirits maker in India. For that deal, ICICI was the sole funder and recently UB Group showed an interest in acquiring French wine maker Tattinger – although the deal has yet to materialise. The group’s recent acquisition of W&M takes it into the premier league of spirits manufacturers.

“UB Group was the world’s third largest spirits maker prior to this acquisition with a wide range of brands,” Chatterjee says. “The potential for premium Scotch whisky in India is enormous and a portfolio of internationally recognised brands could be very effectively leveraged in India using the strong distribution network of United Spirits.

“Whyte and Mackay, with its significant bulk inventory, key brands and manufacturing capabilities, fitted the requirements and the UB Group made an unsolicited bid for the company last year.”

ICICI arranged £325 million of debt on the target company, which was used to refinance existing debt and pay the equity holders. Citigroup arranged £310 million with recourse to United Spirits and proceeds from that debt were used to pay the equity holders and other transaction related expenses. The two debts were raised on separate companies and were ring-fenced from each other.

“The deal value was based on the underlying assets in the Whyte and Mackay Group and future cash flows from both the branded and bulk business of the group,” Chatterjee says. “So the price was appropriate.”

As an adviser to UB Group, ICICI was looking for significant synergies that would accrue to the group as a result of the acquisition. This worked on a number of levels for Chatterjee. “It gave United Spirits a reliable supply source of Scotch whisky to meet growing demand in India and globally,” he says. “UB Group would become a strategic provider of bulk Scotch whisky to industry majors in a market driven by increased demand and rising prices. The second driver was the ability to leverage the W&M portfolio of brands across United Spirits’ powerful distribution network in India. The third aspect was the access for United Spirits own brands to the international distribution network of W&M.”

Chatterjee: “The post integration strategy would be to continue to grow the brands in the key target markets and build a new franchise in key emerging markets where scotch consumption is showing a healthy growth trend.” W&M’s Imerman will continue as strategic advisor at the firm, which will mean a seamless transition with current growth initiatives.

Above all, the W&M deal highlights yet gain the aspirations of Indian firms on a global scale. Last year, $15 billion [£7.5 billion] of cross-border deals were signed with Indian companies and almost $25 billion have been signed in the first four months of this year. ICICI Bank UK has been involved in several of the deals for Indian firms as they have entered new markets abroad.

Chatterjee: “Indian corporates are generating serious revenues. We estimate they are generating free cash flows of about $150 billion every year. This is lending itself to a fundamental repositioning of the scale and scope of Indian firms. Global markets are offering new growth opportunities to these firms. The buoyancy seen in the Indian equity markets and the strong debt markets are also fuelling inorganic growth.”

For the time being, Chatterjee believes this growth through acquisitions will continue unabated for Indian firms. “India continues to progress well and the inflation fears at the beginning of the year have been controlled,” he said. “This growth trend should continue as also the profitability of Indian corporates. This will lend itself to global acquisitions on a far greater scale.”

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