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British distiller, Diageo PLC (DEO - Analyst Report) and India’s largest spirits company United Spirits Ltd. have entered into an agreement as per which Diageo will acquire a 53.4% stake in the latter for 1.285 billion pounds ($2.05 billion), in order to venture into the fast growing alcohol market in India.

Under the agreement, Diageo will buy a 27.4% stake in United Spirits for INR 1440 per share($26.32 per share), amounting to a total consideration of 660 million pounds ($1.05 billion), and make a tender offer for the remaining 26%. Diageo will finance the acquisition through existing cash and debt. The deal is expected to close in the first quarter of 2013.

United Spirits is owned by Indian entrepreneur Dr. Vijay Mallya, who needs sufficient cash in order to bail out his Kingfisher Airlines out of bankruptcy. Besides financial strength, the acquisition will help in reducing debt and provide United Spirits with bright opportunities ahead. Following the acquisition, Dr. Mallya will continue in his current capacity as Chairman of United Spirits.

In addition, Diageo management and Dr. Mallya have also signed a memorandum of understanding (MoU) to form a joint venture to own the traditional sorghum beer business of South Africa-based United National Breweries. The 50-50 joint venture will foray into certain emerging markets of Africa and Asia (excluding India). Diageo is expected to invest approximately 25 million pounds ($36 million).

London-based Diageo, whose brands include Johnnie Walker, Smirnoff and Guinness, has been exploring opportunities to expand geographically through acquisitions, within its financial strength. The company has acquired companies with strong indigenous presence like Mey Içki in Turkey, ShuiJingFang in China and Halico in Vietnam in fiscal 2012. Also in June, Diageo bought Cabin Fever Maple Flavored Whiskey in order to tap the growing markets of flavored whiskey and craft distilling.

Diageo, which competes with SABMiller PLC (SBMRY), currently carries a Zacks #3 Rank (short term Hold rating). We have a Neutral recommendation on the stock.

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