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Quentin Webb/ 12 Nov 12 | 12:55 AM

Diageo is paying a heady price for Indian spirits. The British group, already the world’s biggest maker of top-shelf drinks, is finally taking control of United Spirits, by far India’s largest drinks outfit. Like a shot of unrefined hooch, the $2-billion deal’s financials are harsh to the taste at first. With age, however, the deal may become more appealing.

Under the three-stage agreement, worth up to $2.05 billion, Diageo will acquire a maximum 53.4 per cent of United Spirits, first by acquiring shares from companies linked to chairman Vijay Mallya. It will then buy newly issued stock, and shares from outside investors via a subsequent mandatory offer, all at the same Rs 1,440 price.

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Diageo has sought a piece of United Spirits for a long time. An earlier round of talks fizzled in 2009. But Mallya, who keeps a stake and remains as chairman, is now in a tighter spot. His loss-making and debt-laden Kingfisher Airlines urgently needs fresh capital. So, the puzzle is why Diageo has not secured better terms.

An historic Ebitda multiple of 20 times looks full — even by the standards of emerging markets spirits, where drinks giants usually compete for the few available targets. Synergies are sparse. And, it will take six long years for the deal’s return to exceed its 12 per cent cost of capital. By contrast Diageo gulped down a Turkish raki maker last year for 9.9 times Ebitda, vowing an economic return within five years.

All that would be harder to swallow than backwoods moonshine, were this deal taking place in the stagnant Old World. But growth drives valuation. India’s middle class is mushrooming. Diageo reckons overall alcohol sales in the country should grow 15 per cent annually for the next five years. Even if Diageo cannot beat the market rate, that implies a doubling of sales by 2017. And, persuading drinkers to move upmarket from cheaper brands, like Bagpiper whisky, should fatten margins.

Chief Executive Paul Walsh has smartly reoriented Diageo, buying into Brazilian cachaça, Ethiopian beer, Guatemalan rum, and Vietnamese spirits, as well as raki. He steps down in 2014. With the aim to make a majority of sales from faster-growing emerging markets by 2015, he just lacks a final prize: clinching Jose Cuervo tequila.

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