Diageo is going deeper into emerging markets

Just as everyone else is getting out of emerging markets, Diageo is taking the brave step of increasing its presence in India by buying up its biggest spirits manufacturer.

by Emma Haslett
Last Updated: 27 Jan 2015

As any investor worth their salt will tell you at the moment, whereas emerging economies were the big story of the financial crisis, now the recovery has set in, ploughing your cash into the likes of Brazil, Russia (!), India and China is a rather less encouraging proposition. That’s largely because most would rather put their money somewhere stable, like the US, than somewhere high-risk like India.

Not so for drinks giant Diageo, though: this morning it made a £1.1bn bid for a 26% stake in United Spirits Limited (USL), India’s biggest spirits manufacturer.

Diageo – the world’s biggest producer of sprits – already owns 28.8% of the Mumbai-based company, so this deal would make it by far its biggest shareholder. The British company has offered 3,030 rupees (£30) a share, putting its offer at about 114bn rupees. Not surprisingly, shares in USL rose by 11% on the offer, to 2,840.05 rupees. Presumably, Diageo has realised that without a controlling stake, it's not going to be able to make the most of United's opportunities.

To be fair, whisky fever is spreading like wildfire in India: according to figures by the Scotch Whisky Association, sales of Scotch (imported from the UK) were £68.7m in 2013, up 11.5% from £61.6m the year before. So although India is still only the 14th biggest market for whisky (which, considering the size of its population, is still pretty unimpressive), it’s the third fastest-growing, with only Mexico and Brazil ahead of it.

It suggests Diageo’s interim results, posted in January, may have been more of a blip than a full-on trend. The results showed sales were down in all its regions, with operating profit dropping in Western Europe; Africa, Eastern Europe and Turkey; and Asia Pacific. But organic net sales were up 35% in India. So presumably this is a sign that it’s planning to be more discriminating about which emerging markets it targets in particular.

Here's a look at global demand for British Scotch over the past two years:

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