Diageo Buys United Spirits – Possible Consequences

by Oliver Klimek on November 12, 2012

On Friday, the long-negotiated deal between Diageo and United spirits has finally been finalized. Diageo pays £1.3 billion for a 53.4% stake in the company. With this deal the Indian adventure of Whyte & Mackay has come to a rather abrupt end; and now Diageo has acquired a significant presence in the Indian spirits market.

For months now there had been speculations about Diageo going for a 25% stake. But obviously Vijay Mallya’s financial problems with his Kingfisher Airlines left him no other choice than to let go completely.

I don’t want to speculate about Mallya’s future here, much has already been written, and often the articles read like premature obituaries. But such a major deal in the spirits market evidently raises questions about the future of Whyte & Mackay and Diageo.

With a 2011 turnover of £169 million, Whyte & Mackay contributed roughly one sixth to the United Spirits total turnover. The price paid by Diageo values United Spirits at about £2.4 billion. Based on the turnover figures, Whyte & Mackay has a total value of £400 million. This is quite a bit away from the £595 million that United Spirits paid for the company when they acquired it in 2007. Despite a positive trend in the global whisky business, Whyte & Mackay posted a decrease in turnover and profits for 2011, attributed to the restructuring of the company, away from bulk whisky sales towards strengthening their own brands.

Whyte & Mackay was not the reason why Diageo bought United Spirits. It was the opportunity to enter the highly protected Indian whisky market that was too tempting not to take. One might argue that in times of growing global demand for whisky Whyte & Mackay would come in very handy. But in fact much of it does not really fit into their portfolio. Let’s look at it piece by piece.

The Invergordon grain whisky distillery is probably the tastiest part of the cake for Diageo, but here they might run into anti-trust problems because of their strong position in this segment of the market. They already own Cameronbridge and North British (jointly with Edrington). It could well be possible that they sell at least part of it to avoid anti-trust issues.

Dalmore has been turned into a glitzy single malt brand destined to take on Macallan in the ‘luxury’ whisky market. It was to become the hen that lays golden eggs, with their high end bottlings priced way beyond common sense. No way Dalmore would fit into Diageo’s malt whisky portfolio like that. Indeed prices for the Diageo special releases have shot up painfully, but it has only ever been Johnnie Walker Blue Label that has played the luxury card for Diageo. With single malts only accounting for 7% of their total whisky business this is also very plausible.

It would mean a major shift of paradigm, if Dalmore would be allowed to carry on with their shenanigans under Diageo rule. And putting them under the umbrella of the Classic Malts would mean a major shift of paradigm for Dalmore. I think it is quite likely that Dalmore will be sold straight away. LVMH might be interested, or maybe Rémy Cointreau, if they have any cash left after the Bruichladdich purchase.

Jura may be interesting for an independent buyer or a smaller group. The distillery has been quite inventive when it comes to new bottlings, and I don’t think turning it into a Classic Malt would be a good idea.

Fettercairn has recently been revived as a proper single malt brand after long years of mainly being used or blends. This could actually be quite a useful distillery for Diageo and the malts would fit into their concept better than the others.

Finally Tamnavulin, mothballed for a while but running again; this is blend fodder par excellence. They are capable of producing good whisky, but their 12 yo standard bottling has a very dubious reputation. If they manage to keep up the quality, it’s a keeper for a blend-oriented company like Diageo.

The Whyte & Mackay Blend brand finally… Does Diageo really need yet another blend brand? They have brands galore, and a blend that is focussed on Scotland is probably right at the bottom of their wishlist.

I am pretty convinced that Diageo will not keep all of Whyte & Mackay, and maybe they will even sell all of it. If they do, they will probably sell to a smaller player. I don’t think they intend to strengthen their direct opponents like Pernod Ricard.

I am particulary interested in the future of Dalmore. Will they be able to continue their Investment Grade Whisky tsunami? Will they flood the market with 4 more Constellation Collections as announced by CEO John Beard, bringing the total to a staggering 20000 bottles of overpriced ultra-rare (cough, cough) whisky?

What will become of Richard Paterson, personifying W&M and Dalmore in particular like no other? Will he continue to soak the whisky carpet in his Sample Room? Will he keep on slapping your face if you don’t hold your glass properly? I would not be surprised to see him retire. With over 40 years in the business this may be the point to say goodbye. But maybe he fancies a new challenge, who knows for sure…

On a very marginal note I am also keen to see how the triangle W&M/Mahesh Patel (Sirius)/The Whisky Shop will evolve. Those three have been sticking together for a while, and I am not sure if this symbiosis will continue.

Moving on to Diageo proper, they are now in a rather surreal situation. As a main constituent of the Scotch Whisky Association they have been fighting for the purity of Scotch whisky. And all of a sudden they find themselves as the biggest producer of the infamous cheap Indian molasses-based pseudo-whisky. A major reason for the trade barriers between (and consequently the EU) and India has been the fact that they would not allow the Indian spirit drink to be sold as whisky in Europe, so India made selling Scotch as difficult as possible.

Diageo won’t really bother about selling their Indian booze abroad, they can profit from the large domestic demand, and after all United Spirits has been a successful company. But obviously they also hope to get a better leverage now for negotiations with the government about selling Scotch whisky in India. But if this really will have an effect, remains to be seen. There are projections that the number of modestly wealthy people in India will increase significantly in the future. With the acquisition of United Spirits Diageo could also take advantage of this by producing proper Scotch-inspired whisky in India. Amrut beware…

Interesting times indeed.

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{ 3 comments… read them below or add one }

Gal Granov November 13, 2012 at 4:48 pm

very interesting read
well analyzed Oliver. Will be extremely interesting to see how things go.
I agree on the Jura and Dalmore, as for Paterson, who knows?

time will tell.

G

Reply

John McCheyne November 15, 2012 at 10:05 am

Excellent article , Oliver. Great depth of insightful perspective
I guess behind all the possible business forward plays its hard not to be interested in what’s next for RP on the human interest side. Such a big presence on the whisky stage
But thanks for laying it all out so well

Reply

Henry November 23, 2012 at 7:10 am

Invaluable look at a huge transaction and its repercussions. Many thanks.

Reply

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