As the world’s largest alcoholic beverage company, Diageo (LSE: DGE) (NYSE: DEO.US), with its portfolio of world famous brands, is able to pick and choose where it wants to expand next.
However, one region that has remained outside of Diageo’s reach is India.
Out of reach
India holds huge potential for Diageo. You see, the country is the world’s largest whiskey market in terms of volume. But due to strict import laws, foreign ownership controls and high import tariffs, the market for imported liquors, such as Diageo’s Johnnie Walker, has remained tiny.
Instead, most whiskey sold within India is locally made. This local whisky market is dominated by United Spirits and the company’s profits have soared, as India’s whiskey consumption doubled during the period 2005 to 2010.
Diageo has been trying to acquire United since 2009, when the two companies first began discussions. However, after years of delays and uncertainty, including two separate multi-billion dollar buyout attempts during 2012 and 2013, Diageo has been forced to commence an open tender offer, in order to build a majority stake in the Indian group.
The recent deal saw Diageo offer Rs3,030 per share, an 18.5% premium to United’s share price at the time– a total of $1.9bn.
It is believed that Diageo was successful in gaining a majority stake of the group. Insiders believe that Diageo’s share of United now stands at around 55% — up from the company’s stake of 27% which has been built up over several years.
Huge potential
This deal has huge potential for Diageo. Not only does the company now have access to the largest whiskey market in the world but it also has access to United’s extensive distribution network. The network will allow Diageo to distribute its own beverages, as well as United’s existing offering.
What’s more, the company will be able to use United’s existing infrastructure to sell higher margin premium spirits, such as Johnnie Walker whisky and Smirnoff vodka, bypassing import restrictions.
India’s alcoholic beverage market was estimated to be worth $16.4 billion during 2012, according to research firm IWSR, giving Diageo a huge new market to profit from.
And this market is growing rapidly. Indeed, at present almost 70% of Indian’s do not drink but a young population and a fast-growing middle class are changing consumption habits.
According to Diageo’s own data, India’s spirits market is currently gaining an additional 4.3 million customers per year. More specifically, over the past five years the consumption of premium scotch has expanded at approximately 28% per annum.
Still, Diageo’s management has stated that United is unlikely to impact group earnings until 2016, as it will take some time to integrate the two businesses. Nevertheless, over the long term, Diageo is sure to profit from its Indian expansion.
