Diageo's interest in Indian giant hints at bigger things

Guinness and Johnnie Walker drinks giant Diageo confirmed it is in talks to buy a stake in India's United Spirits from one of the country's most colourful entrepreneurs, Vijay Mallya.

If the deal comes off – and Diageo warned today there was no certainty it would – it would give the British company a major position in one of the fastest-growing drinks markets in the world.

Diageo would not say how much of Mallya's 28 per cent stake in United Spirits it wants to buy. Local reports say he is keen to retain at least a small shareholding. If Diageo were to buy more than 25 per cent it would be forced to bid for the whole of the company, valued at almost £2bn on the stock market.

Such a move could be seen as Diageo chief executive Paul Walsh's swan song since he is due to step down in 2014. The drinks group has always made it clear when making overseas acquisitions that it looks for ultimate total control of companies in which it buys stakes.

Mallya inherited United Breweries, the producer of Kingfisher beer, from his father and consolidated its operations, spinning off the spirits division separately on the Mumbai stock market. But his Kingfisher airline, started as India's first low-cost carrier in 2003, has flown into deep financial trouble, teetering on the brink of bankruptcy.

Staff went unpaid for several months and some aircraft were grounded. Industry analysts recently said it needed a $600m cash injection within the next couple of months.

Diageo's own Indian sales increased by 24 per cent in the last full year with a fast-growing middle class demanding ever more international brands. Locally, Diageo distills Rowson's Reserve while United's top whisky is McDowell.

United Spirits handled 122 million cases of liquor last year while Diageo, the world's biggest drinks company, sold 156 million cases.