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Boby Kurian

BANGALORE, Jan. 25

THE UB group Chairman, Mr Vijay Mallya's equity stake in UB Beer Ltd, the demerged beer-only entity, may fall to 38 per cent from the current holding of 52 per cent once Scottish & Newcastle (S&N) converts its proposed investment of Rs 250 crore into equity.

S&N is expected to cap its holding in UB Beer (UBB) at 26 per cent, according to the agreement reached between both parties on Wednesday night. S&N could convert its investments into equity anytime within five years, but was likely to do it at the earliest.

"There is a strongly worded Letter of Intent between Mr Mallya and S&N Chairman in this regard," Mr Ravi Nedungadi, President & Chief Financial Officer, UB group, said.

When asked whether the UB group would be comfortable with Mr Mallya's reduced holding in its beer business, he added that the group did not envisage problems in future. "At no time during negotiations was any of the foreign players allowed to pose as more than equal to the Mallya family. In fact, one of the main reasons for the pact was the instant rapport between Mr Mallya and S&N Chairman, Mr Brian Stewart," Mr Nedungadi said.

The UB group would anyway continue to hold more than 51 per cent stake, he added.

Analysts' have slammed the pact for its complicated structuring and said the contours of the deal could change dramatically in future.

As per the agreement between S&N and the UB group, the former would infuse Rs 250 crore through preference shares and loan stock into UBB, convertible into 26 per cent equity.

S&N will also invest Rs 175 crore as fresh capital into a joint venture SPV (special purpose vehicle), which is expected play the role of "growth engine" for UBB and cement its dominance in the domestic beer market.

Answering a query on the five-year period for S&N to convert investment into equity in UBB, Mr Nedungadi said the clause was tailored to create a "win-win" situation for both the partners.

"They (S&N) have strong commitment to India, but wanted to go slow and phase investments, given their lack of experience in the emerging markets. For UBB, de-regulation of beer in future would tremendously enhance its valuation," he said.

S&N may infuse fresh capital into the company to get 26 per cent if UBB's valuation soared in the wake of de-regulation, Mr Nedungadi added. S&N, for its 26 per cent, will have one director on the board of UBB.

"But what is more important is that there is a long list of affirmative rights which will give S&N a meaningful role in UBB's affairs," he said.

Mr Nedungadi said the newly floated joint venture SPV between S&N and the UB group, where both parties hold 40 per cent stake each, will be merged with UBB once S&N picks up 26 per cent equity stake in the latter.

"Our plan is to have only one brewing entity in future," he said. S&N's strength in UBB's board could go up after the merger, but details in this regard were not finalised, he added.

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