Shaw Wallace - UB Group Merger - A case study

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Merger and acquisition of any company always interesting for people who are in business. Every cases of this type helps us to understand the mechanism of amalgamation. Although this case is 4 years old but still have some importance. Silence of government authority is also notable in the case.

Shaw Wallace Company

Shaw Wallace is started in 1886 in Calcutta. In 1987 it came under Jumbo Group, lead by Mr. M R Chhabria. Jumbo Group is an international business conglomerate based in the United Arab Emirates. The group is a diversified group with business includes beverages, Tyres, Gelatines, Agrichem, Engineering, Tanneries, Freight Forwarding and Electronics. Its business is established across Hong Kong, Singapore, Japan, South Korea, Vietnam, Russia, United Kingdom, Sri Lanka, South Africa and India. Shaw Wallace was comprises of following divisions: Liquor Division Beer Division Wine Division International Business Traditional Business After demise of Mr. M.R. Chhabria in April 2002, Ms. Vidya Chhabria became chairperson of the group. Chhabrias daughter Komal Chhapria became executive director of Indian flagship of Shaw Wallace & Co (SWC). The $2 billion Jumbo groups Indian operations include flagship Shaw Wallace Co Ltd, Falcon Tyres, Dunlop India Ltd, Hindustan Dorr-Oliver, Mather & Platt, Gordon Woodroffe and New Video Ltd.

UB Group
The UB (United Breweries) Group was founded by Thomas Leishman in 1915. It started its business with manufacturing of beer. Vittal Mallya became first Indian Director of UB group in 1947. In 1983, Vijay Mallya, son of Vittal Mallya, become chairman of the group. He handled the group with more professional management. In 1988, group acquired Berger Paints. Group divested paint business in 1996. UB group has following divisions: Beverage Alcohol Pharmaceuticals Media International Trading Fertilizer Research and Development Aviation

How Merger Proceed

Shaw Wallace controls 10% of the market of the country liquor in States where it operates. As per Ms. Komal C Wazir, Shaw Wallace was present only in Uttar Predesh. Company would try to enter Maharashtra, Karnataka and Rajasthan. Companys beer sales share in country also increased from 33% in the previous year to 35% in the year 2003-2004.

In 2004, Shaw Wallace Breweries Limited (SWBL) was a joint venture between Shaw Wallace and South African Breweries was having market share of 36% in India. United Breweries was in the 1st place with 43% market share in the breweries market. Ready to Drink (RTD) is not selling well in India. RTD was introduced in 2002. Bacardis Breezer, United Breweries Shotz, Balarampur Chinis Xotica, Shaw Wallaces Vebe were hardly selling in the market. In 2003-2004 3.3 lakh cases of RTD sold. High price seemed to be reason of less selling. In October 2004, Shaw Wallace announced that they were eyeing on the export market Australia, France and also ramping up export in Australia. In India, Royal challenge, a premium whisky, increased 54% market share in last year to 65% last year in its segment. Its other brands like Antiquity, Antiquity Super, Directors special, Haywards Fine etc were controlling 16% market share. Shaw Wallace was aiming to become number one or two in every category over the next years. Shaw Wallace president Mr. Samsuddin announced that company was upgrading its machinery to improve manufacturing process. It was expecting 17% y-o-y growth in the next year. Cost of molasses was a concern for the company. Prof Phillip Kotler was added as a long term investment and company was expending more on golf as a part of marketing. Shaw Wallace was doing brand extension and new product lunch in the premier segment only. They said that they did not have any plan to lunch any new product in the regular segment. They started brand extension with White Mischief brand. They already launched gin, vodka, brandy and Black Mischief rum. The entire product range belongs to Mischief line of brand. They also had a plan of launching new brand of malt whisky shortly. United Brewers informed BSE, in November 22, 2004 that it was evaluating unsolicited offer strategic alliance with equity alliance. UB already had Rs. 250 Crore investment from Scottish and Newcastle (S&N) couple of years back. In India only 60-65% bottles were returned to the company and rest of the bottles are injected by the companies. The injection rate is around 15% per annum. Taking advantage to the shortage, second hand bottlers increased price of bottle from Rs. 3.50 to Rs. 7. This price is equal to the price of new bottle. To break monopoly of bottlers UB group and SWBL came together because it was affecting bottom line of both the company. Earlier they had a so bitter relationship that there was undercutting to the extent of loss. In November 2004, Manu Chhabrias widow Vidya Chhabria told McKinsey (based on Singapore) to search buyers for several Chhabria companies. There was an inheritance problem in daughters of Late Manu Chhabria. Ms. Komal K. Wazir was only interested to run the company but others wanted to sell it. In December 2004, Vijay Mallya of UB group announced that he had entered into an agreement with Britains largest brewer S&N for selling 37.5% stake in the company. Under the terms of the deal S&N would have 17.5% stake in the flagship company UB Ltd for Rs. 217 Crore (Rs. 575/share). British company will further infuse Rs. 247 Crore through non convertible redeemable preference share. They would also come with the open offer of 20%. Post deal UB and S&N both will have 37.5% each in the UBL. Rest of the shares will be with the Indian Public and Indian Financial Institutions. Through the deal UB was expecting to capture more than 50% market of Indian Bear Market. This deal would create more pressure on second company Shaw Wallace. Vidya Chhabria, chairperson of $2 billion Jumbo group was in the list of 50 most powerful women in business internationally in 2004. She ranked 38th place in the list and only Indian in the list. She was in the list for third time in succession.

On February 10, 2005 BSE SENSEX closes at 6,577.83 points. Shaw Wallace gains 10% and closes at Rs. 204.15. Mc Dowell & Co Ltd, a flagship of the UB Group also increases 10% to Rs.153.05. UB group was the highest bidder for sprit division of SWC which was put in the block. The UB group had bid Rs. 1251 Crore. Later SWC changed it plan and invited bid for 55% stake in the holding company. On February 23, 2005, Mr. Vijay Mallya announced 25% open offer for Shaw Wallace Rs. 250. This is an 8.2% premium over the last closed price. He also indicated a breakdown of talks between UB group and Ms. Vidya Chhabria of Shaw Wallace Company (SWC). This offer valued Shaw Wallace Rs. 1200 Crore which is 120% premium over market capitalization of last 12 months. Mr. Mallya also said that none of his company has acquired any stake in Chhabria Group Company. Total cost of the open offer will be Rs.300 Crore. Open offer of UB group is through group companies McDowell & Co, Phipson Distillery and United Sprits. After the acquisition UB group will become worlds second largest breweries company with 49.5 cases volume. Business volume of UB group was 35 million and SWC had 14.5 million cases. Share holding pattern of SWC is shown in Exhibit 2. It is clear that open offer of UB group is targeted part of institutional investor also. Although Mr. Mallya clarified that he needs to come up with offer after the getting promoters share also. SWC has 40% of the equity of Shaw Wallace Distilleries, the sprit company, and has a 50% stake in SAB Miller India which is a joint venture between South African Breweries and Shaw Wallace for bear business. All group companies of Jumbo Group including SWC has cross holding. Move of the financial institution would be vital in SWC. If they opted for open offer to sell their entire stake then UB group will have mandatory 26% stake to move or block any special resolution. Financial performance of Shaw Wallace had been slackening. Its revenue is stand still at Rs 100 Crore. Its Profitability has slipped since 2002 and operating income has also fallen dramatically. It was the time liquor and tobacco companies were making profit worldwide. Corporate governance of SWC board needs to show that they are for all stock holders not only for promoters. Next day of the open offer announcement by UB group for SWC, share price of SWC had fallen 2.5% to Rs. 225. Share price of UB flagship Company McDowell & Co. had rose 10% to Rs.172.55. Shaw Wallace said they were considering legal option against the UB group bid but it is an open offer and legal options are limited. LIC chairman LN Bhardwaj told that they were considering the offer. February 26, 2005, Shaw Wallace announced that it had dropped 6 brands. Stopped brands are Malkajgiri Malt Whisky, Punch Fine, High Command, Gold Medal Brandy, Black Panther Rum and Kings Blend Brandy. They said the increase in the raw material cost is the reason for this discontinuation. Shaw Wallace said that they reworked their brand strategy and now the focus would be on improving the product mix and enhancing the value of existing brands. Calcutta High Court passed a stay order on selling of SWC stock after a petition by three companies Visishth Chai Vyapar Pvt Ltd, MKJ Enterprises and MKJ Developers Ltd. They appealed that they had given a short term loan of Rs. 80 Crore to SWC in 1993-94. Now if ownership trademark and brand names are transferred then recovery of money will not be possible. Later there was an out of court settlement of Rs 57 Crore.

In March 20, 2005, SWC announced that they are open to any fair price for selling off. Earlier they hold the sell off of 55% stake of Chhabria family. March 31, 2005. Vijay Mallya announced that UB group had closed the deal with Chhabria family owned Jumbo World Holdings Ltd (JHWL) for Rs. 1330 Crore ($300 m) for a stake of 54.54% share of SWC. The deal is evaluated as Rs 325 per share. UB group also said than open offer price has been revised to Rs.260 per share. Majority control of Narmada Gelatine Ltd will be divested to Jumbo affiliate as soon as practicable to maintain Jumbo Management Team. UB group also in the process of Herbertsons Ltd, the make of Bagpiper whisky, after the out of court deal with Kishore Chhabria. When asked about the over valuation of Rs1300 Crore for SWC Mr. Mallya said the every year SWC and UB spend Rs 200 Crore each for just fighting with each other. This will now be added to the bottom line. There would be two companies United Breweries and SWC still FY 2006 and then they would be merged to United Sprit. Mallya also clarified that he was only interested in sprit business and no other business. This also excludes bear joint venture of SWC. Industry estimate for valuation is Rs. 80 Crore for a million cases.

Regulatory and Legal Issues

Competition Committee of India (CCI) might investigate any deal (involving two Indian companies) in which exceeds Rs.1000 Crore or where the combines asset exceeds Rs. 300 Crore. When two Indian companies involved the threshold limit is Rs 4000 Crore for assets and Rs. 12000 Crore for revenues. UB-SWC deal qualified for both the counts. India market capacity is 110 million cases of Indian Made Foreign Liquor (IMFL). UB and SWC will have together 55 million case capacity i.e. more that 50%. A huge gap between other player and the group is also a matter of concern. Other players like Radico Khaitan, Mohan Meakins and Seagram having market share of 6-7 million cases.

How the Deal was financed

The deal was financed by borrowing $300 million from ICICI bank win equal proportion of foreign and domestic currency. UB group has paid Rs 1545 Crore including Rs.312 Crore for acquisition of 25% share through open offer. Post open offer UB group has 75% share.

Realization of Intended Object

UB Group becomes the third largest sprit company in the world. Britains Diageo Plc is in the first place and Frances Pernod Ricard PA (after buying Britains Allied Domecq) is in the second position. Synergy in the merged entity Increased bargain power with monopolistic customer (Government share of market is 65% and Private market share of about 16%) Economics of scale of distribution system. Increased bargaining power with the suppliers like bottles Organizational savings arising from consolidation through elimination of multiple offices and duplication of manpower Reduced promotion spent and improved market realization

Post Merger Situation

In August 2006, Shaw Wallace Financial Services and Shaw Wallace Breweries limited merged. It was declared in 59th AGM of Shaw Wallace in September 2005. It was also declared that combined entry had 130 brands out of which 35 brand fetch 90% of the profit. McDowell announced that following eight companies were amalgamated into one entity of McDowell India Sprits Ltd and later named as United Sprit Ltd.

1. 2. 3. 4. 5. 6. 7. 8.

Phipson Distillery Ltd United Spirits Ltd Herbertsons Ltd Triumph Distillers and Vintners Pvt Ltd Shaw Wallace Distilleries Ltd Baramati Grape Industries Ltd United Distillers India Ltd McDowell International Brands Ltd.

Long standing legal battle of Shaw Wallace ended on October 1, 2007. It had been settled for mere Rs 34.44 Crore, which is only 7.5% of the original demand i.e. Rs. 464 Crore. This had cleared the barrier of legal merger of Shaw Wallace into UB Group. Shaw Wallace passed board approved merging of the company with United Sprit Ltd. Shaw Wallace shareholder got four share of United Sprit for every 17 share they hold.

Gains to shareholder of target and acquirer

Gains of Target (Shaw Wallace Company) EPS has increased significantly from 0.02 in 2003-2004 to 6.14 in 2007-2008. Details are given in Exhibit 4. Net profit also increased from Rs.0.09 Crore in 2003-2004 to Rs. 29.48 Crore in 20072008. Details are given in Exhibit 5. Operating profit margin, Gross profit margin and Net profit increased significantly. Details are given in Exhibit 5. Net Cash flow from operating activity also increases. Details are given in Exhibit 7 Dividend percentage also increased. Details are given in Exhibit 8 Stock Price of Shaw Wallace was below Rs. 250 before Jan 2005 but it was more than Rs 250 at after June 2007. Merger has created a large amount of share holders value for Shaw Wallace Company. A study by Assocham said that Shaw Wallace was in the 10food and beverages company in terms of market capitalization. It had given 261 percent return in 2004-2005 against 123 percentage return in 2003-2004. It occupied last slot in terms of market capitalization in 20032004.

Reference
Financial Express o http://www.financialexpress.com/search.php?q=shaw %20wallace&ao=and&col=all&dtc=ed&tl=233&pg=16 Economic Times o http://economictimes.indiatimes.com/articleshowarchive.cms?msid=5094655 Business World o http://www.businessworld.in/index.php/Year-of-deals.html

Exhibit 1 - Breweries company position in 2005

Company Diageo (UK) Pernod Ricard Allied Domecq UB Group Business Volume (Million cases) 96 45 43.6 35

Exhibit 2 - Shareholding pattern of Shaw Wallace Company in January 2005

Institutional Investor Indian Public Promoter Holding Institution Holding Details: Unit Trust of India Financial Institution and Insurance Company LIC 28.80% 14% 57.20% 7.84% 14.03% 4.60%

Exhibit 3 - Income Statement Shaw Wallace

Mar ' 07 Income: Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative expenses Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs 138.2 95.12 2.99 8.9 5.83 28.66 141.5 -3.31 13.99 10.68 6.76 1.19 Mar ' 06 115.52 79.45 3.33 9.78 0.94 40.38 133.88 -18.36 13.57 -4.79 3.94 1.4 Mar ' 05 112.54 80.31 2.86 8.35 0.65 22.1 114.28 -1.74 5.83 4.08 9.61 1.39 Mar ' 04 103.89 57.57 2.49 9.19 0.43 25.57 95.24 8.65 10.69 19.35 7.48 2.06 148.94 -1.87 5.86 4 7.7 2.57 Mar ' 03 147.08 82.39 4.57 20.92 11.99 29.07

Adjusted PBT 2.73 -10.13 -6.92 Tax charges 9.46 41.78 3.65 Adjusted PAT -6.73 -51.91 -10.57 4.00 Non recurring items 78.89 95.69 0.75 Other non cash adjustments 9.92 3.07 -15.06 Reported net profit 82.08 46.86 -24.88 Earnings before appropriation 82.31 5.71 -41.91 Equity dividend 7.2 4.8Preference dividend Dividend tax 1.22 0.67Retained earnings 73.89 0.24 -41.91 All figures are in Rs. Crore (other than ratio)

9.8 5.81 3.79 -4.2 3.59 4.47 4.47

-6.28 6.48 -12.75 11.28 -3.26 -4.74 -4.12

-4.12

Exhibit 4 - Shaw Wallace Company Ltd, Annual Result Brief

Sales Operating profit Interest Gross profit EPS (Rs) Mar ' 08 189.19 31.96 10.34 47.8 6.14 Mar ' 07 249.14 -2.21 6.27 81.39 14.53 Mar ' 06 204.24 -72.71 4.96 99.19 12.5 Mar ' 05 192.05 -4.49 6.79 4.92 -0.97 Mar ' 04 163.93 -13.29 2.93 4.49 0.02

Exhibit 5 - Annual Result Details, Shaw Wallace Company

Other income Stock adjustment Raw material Power and fuel Employee expenses Excise Admin and selling expenses Research and development expenses Expenses capitalized Other expenses Provisions made Depreciation Taxation Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 26.18 89.87 176.86 16.2 20.71 -3.97 2.51 3.41 2.18 -4.96 42.01 48.62 39.48 39.16 29.02 9.24 8.62 9.79 8.35 9.19 108.88 88.73 79.52 60.04 16.7493.21 82.72 106.54 67.33 62.43 2921.5 2.98 1.53 1.4 1.39 2.06 15.34 10.11 37.78 3.65 5.81

Net profit / loss Extra ordinary item Prior year adjustments Equity capital Equity dividend rate Agg.of non-prom. shares (Lacs) Agg.of non promoter Holding (%) OPM (%) GPM (%) NPM (%)

29.48 16.5448.01 120.02 25 16.89 22.19 13.69

69.75 48.01 120.02 25 -0.89 24.01 20.57

60.01

48.01 120.02 25 -35.6 26.03 15.75

-4.66 -4.54 -20.22 48.01 218.22 45.46 -2.34 2.36 -2.24

0.09 3.47 -18 48.01 218.37 45.49 -8.11 2.43 0.05

All figures are in Rs Crore (other that ratio)

Exhibit 6 - Balance Sheet, Shaw Wallace Company

Mar ' 07 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lacs) All Figures in Rs. Crore Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03 48.01 73.89 106.36 228.25 0.24 0.52 107.7 156.46 48.01 48.01 -41.15 5.42 149.03 161.3 48.01 -16.27 12.01 117.2 160.94 48.01

1.64 31.37 77.1 158.12

31.85 3.54 15.44 12.87 0.7 158.69 168.65 112.67 55.98 228.25 76.51 851.8 28.53 480.06 -

35.73 8.48 15.29 11.96 0.01 94.01 156.97 106.49 50.48 156.46 11.83 0.57 60.68 480.06

37.07 10.18 15.14 11.75 0.26139.21 94.06 83.98 10.08 161.3 139.08 0.38 61.79 480.06

38.91 11.43 14.48 13 139.21 99.36 90.62 8.73 160.94 139.08 0.2 566.83 480.06

53.45 16.43 20.04 16.98 0.12 140.26 109.21 108.45 0.76 158.12 140.13 0.26 784.63 480.06

Exhibit 7 - Cash flow statement, Shaw Wallace Company

Profit before tax Net cash flow-operating activity Net cash used in investing activity Net cash used in fin. activity Net inc/dec in cash and equivalent Cash and equivalent begin of year Cash and equivalent end of year All figures in Rs. Crore Mar ' 07 Mar ' 06 Mar ' 05 Mar ' 04 Mar ' 03 114.81 88.64 -1.02 23.93 17.82 57.98 129.26 -26.15 -29.62 11.1 20.84 -15.02 8.41 7.27 22.21 -8.87 -54.69 18.05 21.87 -36.79 69.95 59.55 0.31 -0.48 -3.48 61.84 2.29 1.98 2.46 5.55 131.79 61.84 2.29 1.98 2.07

Exhibit 8- Dividend, Shaw Wallace Company

Year 2008 2007 2006 2001 Month Dec Sep Feb Aug Dividend (%) 10 15 10 -

Exhibit- 9 Stock Price Shaw Wallace

Month Stock Price (Rs.) Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 Month Stock Price (Rs.) Apr-05 231.45 May-05 181.90 Jun-05 155.60 Jul-05 175.30 Aug-05 187.30 Sep-05 163.15 Oct-05 139.15 Nov-05 138.45 Dec-05 145.15 Jan-06 158.20 Feb-06 165.85 Mar-06 182.75 Apr-06 225.55 Stock Price Month (Rs.) Apr-07 116.25 May-07 175.65 Jun-07 284.85 Jul-07 287.25 Aug-07 259.70 Sep-07 320.60 Oct-07 349.55

28.10 34.15 42.65 49.00 41.30 50.45 57.70 70.55 73.25 47.60 64.55 59.75 75.10

May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05

68.90 69.25 60.70 104.15 99.60 99.20 146.55 154.60 136.90 223.80 215.20

May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

149.80 120.65 114.75 135.55 149.30 149.90 160.20 143.25 161.85 130.10 115.10

Exhibit- 10 Stock Price UB Holding

Month Stock Price (Rs.) Apr-03 16.6 May-03 19.75 Jun-03 21.2 Jul-03 25.25 Aug-03 24.65 Sep-03 25.15 Oct-03 21.2 Nov-03 27.45 Dec-03 43.3 Jan-04 35.5 Feb-04 39.05 Mar-04 38.45 Apr-04 37.85 May-04 34.8 Jun-04 33.85 Jul-04 33.3 Aug-04 34.45 Month Stock Price (Rs.) Apr-05 305.6 May-05 290.85 Jun-05 446.95 Jul-05 458.4 Aug-05 523.55 Sep-05 437.4 Oct-05 358.5 Nov-05 468.2 Dec-05 524.85 Jan-06 598 Feb-06 595.75 Mar-06 726.9 Apr-06 840.85 May-06 685.2 Jun-06 444.95 Jul-06 192.2 Aug-06 227.6 Month Stock Price (Rs.) Apr-07 840.85 May-07 685.2 Jun-07 444.95 Jul-07 192.2 Aug-07 227.6 Sep-07 265.45 Oct-07 289.8

Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05

37.65 36.3 75.35 99.8 85 98.6 168.75

Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07

265.45 289.8 350.15 345.05 425.35 345.3 359.5

Exhibit- 11 Share Holding Details