United Spirits – Diageo Open Offer Review

 

On November 09, 2012, Diageo agreed to acquire a 27.4% stake in United Spirits through a combination of purchase of shares from existing promoters and a preferential allotment of shares, post which a mandatory open offer for additional 26% stake was announced. However, the interpretation of the relevant date for making the public announcement and hence the open offer price is questionable and demands a thorough review by regulatory authorities.

The main contention regarding USL-Diageo deal revolves around the interpretation of the relevant date for making the public announcement (PA) and hence the open offer price.

Regulation 13(g) of the SAST states that the PA in case of acquirer acquiring shares or voting rights in, or control over the target company, under preferential issue, shall be made on the date on which special resolution is passed for allotment of shares under sub-section (1A) of section 81 of the Companies Act, 1956.

Regulation 8(2) of SAST also states the methodology for calculating offer price will be as follows:

Offer price will be higher of:

  • the highest negotiated price per share of the target company for any acquisition under the agreement attracting the obligation to make a public announcement of an open offer
  • the volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any person acting in concert with him, during the fifty-two weeks immediately preceding the date of the public announcement;
  • the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, during the twenty six weeks immediately preceding the date of the public announcement
  • the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the date of the public announcement as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, provided such shares are frequently traded
  • where the shares are not frequently traded, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies; and
  • The per share value computed under sub-regulation (5), if applicable.

Currently, the public announcement date for the entire transaction is the date on which the share purchase agreement was signed (i.e. November 09, 2012), and the open offer price has been set at the maximum negotiated price between the two parties which is INR 1,440.

But if we were to interpret that the effective change of control happens only post preferential allotment (or at least post shareholder approval for the allotment), the public announcement date should have been the date of shareholder approval (i.e. December 13/14, 2012) and hence the open offer price should have been calculated taking December 13/14, 2012 as relevant date and using the pricing formulae as above. This would have increased the open offer price to be greater than INR 1,440 given the recent rise in stock prices.

The matter is left to interpretation on how the company could assume a change of control (of more than 25% stake, which is the open offer trigger) to happen prior to the passing of the special resolution by shareholders for a preferential allotment.

The ethos behind Regulation 13(g) is to give the shareholder the right to accept or reject such an allotment and hence the obligation/liability for a PA (and open offer) on the company/acquirer is only post such an approval. If company’s interpretation is assumed to be correct and if such cases were to be approved, shareholder meetings can be interpreted as just a procedural obligation to be completed without any specific rights given to shareholders to approve or reject a particular corporate action.

Based on current regulations, InGovern’s interpretation is that the company should have made a two step transaction process and disclosure regarding this transaction:

  • First Step – Disclosure of the share purchase agreement where the promoter sells 17.6% stake to Diageo followed by regulatory disclosures under chapter VI of SAST (without an obligation for open offer)
  • Second Step – Post closure of the SPA transaction between the two parties, another disclosure should have been made for the preferential allotment agreement followed by a postal ballot notice for the shareholders to approve the preferential allotment.
  • The “Public Announcement” should have been made only post shareholders approving the preferential allotment as per Regulation 13(g).

By combining all the transactions and issuing one PA for the entire process, the company has effectively fixed the acquisition price (as the negotiated price of INR 1,440) for the acquirer, with minority shareholders losing out on any post PA share price increases.

SEBI should review the provisions of the Public Announcement and provide a clarification whether the company’s interpretation is in line with the SAST regulations for future transaction as well.