How Diageo and Mallya screwed USL shareholders

Below is the transcript of JN Gupta’s interview with Sonia Shenoy and Menaka Doshi on CNBC-TV18.

Menaka: The open offer price when the acquisition first happened, was Rs 1,440. You are saying that that price is in some ways is fiction because there were other benefits to Vijay Mallya that Diageo had promised or indirect benefits to Vijay Mallya that Diageo will now have to deliver on which ought to have been factored into the open offer price. The first one you allude to is a guarantee, a bank guarantee that Diageo gave to a Mallya entity called Watson. And Watson was going to use that money to relieve the lien on certain USL shares that it had owned so that it could sell those shares in turn to Diageo. That bank guarantee is about to be invoked you are saying?

A: Yes.

Menaka: Can you give us more details on why you think that is not priced into the open offer?

A: The whole objective of the takeover code that Sebi is has set is that it had to be fair, transparent and give a treatment to the shareholder at least the same, if not more that has been given.

Menaka: So, that is accepted. Why are you saying that the price does not reflect the bank guarantee?

A: Why we are saying this is because when those shares were bought by Diageo, they were earlier pledge to a lender under a facility to whatever it may be. Diageo agreed to extend a bank guarantee to release those shares and purchase those shares. So, what happens, when you issue a bank guarantee; you have a cost, which is a very nominal cost of the bank guarantee commission or foregoing on the interest. But the bigger issue in a bank guarantee is the contingent liability that may arise out of the invocation of the bank guarantee. As is the case, which Diageo has mentioned in annual report, that there is a likelihood that they will not be able to recover this cost from that. They will not be able to recover this money from Mallya.

Menaka: So, essentially, the bank guarantee that they had given to a Mallya entity is about to be invoked because that loan for which they had guaranteed, the Mallya entity has defaulted on that loan. It is a USD 135 million loan and Mallya has defaulted on the loan, so there is a good chance that this bank guarantee will be invoked and therefore this money will have to go from Diageo’s pockets. You are saying it should be accounted for as part of the acquisition price.

A: My point is this. I have been a banker myself. When you give a bank guarantee, you give bank guarantee for a purpose and especially in a bank guarantee which is given for the third party where you have no control, then there has to be very strong logic for that. So, first of all, Diageo and Mallya, they never disclose to the regulator or to the public at large, that there was a underlying transaction.

Menaka: But, they did disclose in the 2013 annual report that such a bank guarantee had been extended, right?

A: The open offer disclosure was made on November 10, 2012 and that time all these things were already decided by that party that this will be the procedure.

Menaka: But, how do you expect Diageo, the acquirer in 2012 to know that a bank guarantee that it was offering an affiliate entity of Vijay Mallya was ultimately going to get invoked in 2015 because Mallya was never going to pay that money?

A: I am not at all arguing it.

Menaka: So, how could they have factored it into the open offer price?

A: My point is this. First they should have disclosed it. Secondly look into the circumstances. A person does not mortgage or pledge his shares unless and until there is a financial difficulty. If you are selling those very shares which have got released from using my guarantee, why did you not pay the same money which you got it from me to release the bank guarantee also? Why it has to be double financing for the same very shares. It is like this that I am buying a house which has been mortgaged by the seller to a bank. First I give a guarantee to the bank to release the mortgage and pay the same money for the same house, so that means the person is having money also.

Menaka: So, you are saying Diageo paid twice for those shares technically?

A: Now, coming to when that guarantee has been invoked, it is proof that they are paying twice.

Menaka: But, in the disclosures Diageo does say that it is a complex process of the guarantee being invoked and therefore what the contingent liability or USL or Diageo’s books will be in that sense, so it is not necessary that the full amount of USD 130 million will be paid by Diageo.

A: You have brought a very interesting fact into this because if you see the full disclosure of Diageo, it is Mr Mallya who is disputing everything. He says that Diageo has promised certain financial benefits to me and Diageo has failed.

Menaka: So, that is your second point of contention?

A: Yes.

Menaka: That those certain financial benefits nobody knows what they were or what they are, have not been accounted for in the open offer price. These are all disclosures that are coming out in the open only now and indicate that there are indirect benefits to Mr Mallya which should have been priced into the open offer.

A: So, the whole deal was an integral thing. As things are unfolding now, it appears that Rs 1,440 was just the naked price that was paid. Attached to that was the bank guarantee issue. Attached to that was the financial benefits that were promised to Mr Mallya which Mr Mallya is saying that Diageo did not fulfill and that is why the fight. As far as I am concerned, I do not care what their fight is. But look at the shareholders who should have been told that these are the attached transactions related to the purchase.

-from Money Control

One reply on “How Diageo and Mallya screwed USL shareholders”

Crooks cant be saints. Expecting them to be, makes us fools. Hapless small investor will always suffer. This is just one of those open offers where only the promoter gains indiscriminately. I have analysed a few others like Patni-iGate takeover – how they prepare a pitch 1-2 years advance for the open offers to shareholders, how company’s market operators manipulate market prices, how their financial statements are manipulated (with such low quality of audits as shown in Satyam case) etc.

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