BackSlim pickings in market behind Mansion House battle
Allied Blenders' pursuit of Tilaknagar shows dearth of attractive brands, M&A options for liquor firms in India
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Bangalore/Mumbai: Why are Tilaknagar Industries Ltd and Allied Blenders and Distillers Pvt. Ltd (ABD) battling for a brandy called Mansion House?
The attempted hostile takeover of Mansion House brandy maker Tilakanagar by the bigger rival Allied Blenders shows the dearth of attractive liquor brands in India and the limited options available to companies looking for acquisitions.
Officer’s Choice whisky maker Allied Blenders, which has been trying for more than 10 months to buy Tilaknagar, said last week that it acquired 50% ownership rights in Mansion House and Savoy Club brands from Herman Jansen Beverages Nederland B.V. Allied Blenders wants to acquire Tilaknagar, but the latter says it is only open to stake sale.
Tilaknagar, which has been making Mansion House brandy in India since 1983 under a commercial arrangement with UTO Nederland B.V., now known as Herman Jansen, swiftly rejected the Allied Blenders’ deal. The relationship between Herman Jansen and Tilakanagar has soured over time, with both parties suing each other.
India’s liquor industry is dominated by two multinational companies: Diageo Plc, which owns a controlling stake in United Spirits Ltd, and Pernod Ricard. Apart from the brands owned by these two firms, there are only a few successful higher-margin brands of scale in India, data shows. In the so-called semi-premium or prestige segment, which sees large volumes, Mansion House is the second biggest brand not owned by USL and Pernod, data published by International Wine and Spirits (IWSR) showed.
In this segment, Tilaknagar sold 4.9 million cases (of nine litres each) of Mansion House in 2013; Aristocrat whisky, owned by Jagatjit Industries Ltd, reported sales of 6.7 million cases, IWSR data showed; Allied Blenders’ Officer’s Choice Blue, an upgrade of its Officer’s Choice whisky, sold about 3 million cases in 2013.
“Not many Indian companies have been able to build good premium or semi-premium brands and Mansion House is one of the very few that we can acquire," Allied Blenders chief executive Deepak Roy said.
The semi-premium segment sees intense competition, due to large volumes and margins which are relatively higher than in the “regular" segment. A 750ml bottle of Mansion House brandy costs ₹ 586 in Karnataka, while a McDowell’s No. 1 brandy bottle of the same volume, which is in the segment immediately below Mansion House, costs ₹ 419.
“Margins of semi-premium brands are higher by 30 percentage points than those of regular segment brands," Roy said.
Allied Blenders has grown sales faster than any other Indian liquor company over the past three years. The Kishore Chhabria-owned company has been trying to move sales toward higher-margin products and Mansion House fits that criterion. Apart from boosting margins, acquiring Tilaknagar will bolster Allied’s presence in southern India, which accounts for more than half of India’s liquor sales by volume.
“It gives us a semi-premium brandy of good scale. We have some small brandies here like Kyron, but it will take us much longer to scale them than it would if we were to buy Tilaknagar," Roy said.
For Tilaknagar, Mansion House is critical: it generates over 50% of the firm’s total 2013-14 revenues of ₹ 806.8 crore and is the only higher-priced brand of any meaningful scale.
Amit Dahanukar, chairman and managing director of Tilaknagar said that apart from Mansion House, the country’s second largest selling brandy, the firm has also developed other brands like Courier Napoleon brandy and White House rum, both of which sell more than a million cases every year.
“The rights to the brands Mansion House and Savoy Club vest with Tilaknagar. They are neither with Herman Jansen nor with Allied Blenders. This has been upheld by the Bombay high court. If Allied Blenders attempts to sell the same brand, it will be tantamount to deception of consumers. The brand Mansion House and Savoy Club are synonymous with Tilaknagar Industries. If, indeed, an attempt is made by Allied Blenders to produce and sell our brand in India, then the law of the land will take appropriate action as deemed fit," Dahanukar said.
When asked about the measures Tilaknagar will take to allay fears of investors after Allied Blenders’ announcement, Dahanukar said his company was not aware of what rights Allied Blenders has procured.
“It is like somebody claiming to have bought 50% of Taj Mahal (of Agra) or 50% of Victoria Terminus station. A moot point would be, can one sell or buy what one does not possess?" Dahanukar asked.
He said the Bombay High Court had already decreed that the rights to Mansion House and Savoy Club, for India, vest solely in Tilaknagar.
“We have implicit faith in our judiciary," he added.
Local liquor companies such as Allied Blenders, Radico Khaitan Ltd and others could eye United Spirits’ brands in the future, analysts say.
Diageo wants to improve margins at United Spirits and the company “won’t shy away from exiting the mass-end brands that do not make money", Diageo CEO Ivan Menezes had said at an analyst meeting in November.
USL has more than 25 brands and its cheaper brands together comprise more than 70% of overall sales by volume.
“M&A (merger and acquisitions) activity in the semi-premium space and below may be driven by United Spirits going forward," said an analyst at a multinational brokerage.
“Diageo may look to sell brands to rationalize USL’s portfolio and focus on higher-margin brands. This may create opportunities for players like Allied Blenders to pick up these brands in future," the analyst said, on condition of anonymity.
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