The development, which comes at a time when he is trying to overcome financial problems in his grounded Kingfisher Airlines, Mallya said this is not a "sell out" to save the carrier and no funds from this deal will be used for reviving the airlines.
Following the completion of the stake acquisition, which took six years to materialise, India will become the second largest market for Diageo after the US.
"This is not a sell-out, it's my appreciation of needs... I have recognised the consolidation needs (of Diageo) and whole-heartedly appreciate it... I have not sold any family jewel but embellished it," Mallya told reporters in a conference call after announcing the deal.
He stressed that the money received from Diageo will not be used to bail out the beleaguered Kingfisher Airlines, which will address issues separately and independently.
"I do whatever is best for my businesses. I have done what is best for my beer and I have done what is best for my spirit business. I will do the best for the airline, but separately... I will address the Kingfisher problems fairly and squarely. These are mutually exclusive," Mallya said.
Earlier in a joint statement, the UK-based firm said it has entered into an agreement with United Breweries (Holdings) Ltd (UBHL) and United Spirits Ltd (USL) to acquire 27.4 per cent stake in USL, the top liquor company in India at Rs 1,440 per share aggregating Rs 5,725.4 crore.
Shares of the company today closed at Rs 1,359.70 on the BSE, up 1.22 per cent over the previous close.
Further, Diageo will also acquire 19.3 per cent stake in USL at a price of Rs 1,440 per share from the UBHL group, the USL Benefit Trust, Palmer Investment Group Ltd and UB Sports Management (two subsidiaries of USL) and SWEW Benefit Company (a company established for the benefit of certain USL employees).
The company will seek approval from USL shareholders for a preferential allotment to Diageo at a price of Rs 1,440 per share of new shares amounting to 10 per cent of the post-issue enlarged share capital of USL.
It further said it will launch a tender offer to acquire a further 26 per cent stake in USL at a price of Rs 1,440 per share.
"On completion of the share purchases as described above and in the event that the tender offer were fully subscribed, Diageo will hold 53.4 per cent of the enlarged USL share capital at an aggregate cost of Rs 11,166.5 crore," the company said.
Commenting on the acquisition, Diageo Chief Operating Officer Ivan M Menezes said: "India will become Diageo's second biggest market after the US. India has the potential to become the largest market in the long term."
Talking about the initial receivables, Mallya said USL will get Rs 3,300 crore, while Rs 2,400 crore will go to UBHL's account.
When asked about the debt position, he said: "At present, USL has a debt of about Rs 8,300 crore. The money, which will come into USL, will primarily be used to reduce debt."
Asked if this deal will affect USL's Whyte & Mackay in anyway, Mallya replied in negative and said it will not be treated separately.
On its need to acquire a stake in an India entity, Menezes said: "We are entering into a partnership today. Our aim is to consolidate USL into Diageo... We hold stakes in local companies and that is the strategy in India as well."
Following completion of these agreements, Mallya will continue in his current role as Chairman of USL, and UBHL and he will work with Diageo to build the USL business as the current consumer trends for premiumisation grow in India. Commenting on the deal, Diageo Plc Chief Executive Paul S Walsh said: "The combination of USL's strong business with the capabilities which Diageo brings as the world's leading premium drinks company will ensure that USL continues to lead the industry in India."
Citi Group was the lead financial adviser to United Breweries (Holdings) Ltd and United Spirits Ltd.
Meanwhile, Diageo and Mallya also inked a pact to form a 50:50 joint venture which will own United National Breweries' traditional sorghum beer business in South Africa.
Diageo's investment for its 50 per cent interest in the joint venture is expected to be around USD 36 million, the joint statement said.
"Diageo and Mallya are also considering the possibility of extending this joint venture in order to maximise opportunities which exist in certain emerging markets in Africa and Asia (excluding India)," the companies said.
For the year ended 2011, Diageo's revenues stood at 13.3 billion pounds and its net income stood at 2.01 billion pounds. The company, which is the world's largest spirits maker, sells various popular brands including Smirnoff Vodka and Johnnie Walker whiskey.
On the other hand, Bangalore headquartered USL's revenues stood at Rs 7,659.89 crore for the fiscal ended March 31, 2012. The company posted a net profit of Rs 342.79 crore during the fiscal.
USL is the India's top spirits maker and markets various liquor brands including Signature, Bagpiper, Antiquity, Royal Challenge, Signature in the country.
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