Giant wine foreign company Diageo trapped between lines in unprofitable deal named Halico

In last April, Ha Noi Liquor Joint Stock Company (Halico) was listed on the market for unlisted public companies (UPCoM) with the code HNR.

To divest capital from Halico, Hanoi Beer Alcohol and Beverage Joint Stock Company (Habeco) made Halico become a public company. With the ownership of 54.3 per cent stake, Habeco is currently the largest shareholder of Halico and another major one is the UK's Diageo which holds 45.5 per cent.

In the past, Halico was a leading company in wine market and it was well-know with Vietnam's number one wine brand named Hanoi vodka. In the period from 2008 to 2011, this company's revenue continuously grew. In 2011, Halico gained record revenue of $46.8 million and profit of $5.1 million.

These positive factors made a giant wine foreign company Diageo, the world's largest wine company, express its intention to acquire Halico with the price up to $9.37 per share which made Halico's valuation up to $189 million.

At that time, that state-owned enterprises sell shares to foreign companies was not as common as today and high valuation of Halico was rare.

Through a few financial institutions such as VinaCapital, Diageo acquired a part of Halico. In 2011, this foreign company spent $35 million to buy 18.67 per cent stake in Halico from VinaCapital. In the middle of 2012, Diageo added 26.83 per cent stake, thereby becoming the second largest shareholder in Halico with 45.5 per cent.

Diageo was estimated to spend more than $87.7 million to buy this amount of Halico's shares. Under the agreement, Diageo would support Halico to strengthen its capabilities including product and brand development, supply and distribution system and Hanoi vodka would be the focus of development.

However, soon after joining the board, Diageo realized that the plan of acquiring Halico was not a lucrative deal.

In September 2012, Halico was found to be engaged in smuggling and tax evasion. 2000 vodka barrels to Laos which were discovered at the Cau Treo border gate caused this company to be prosecuted criminal and since then, Halico's business has gone down.

In recent years, Halico's business results were worse and worse and from earning hundreds of billion dong in profit, Halico suffered massive loss. By the end of 2017, this enterprise made a loss of $11.2 million in total. At the same time when revenue and profit declined, the position of the Hanoi vodka brand was also gradually come to an end.

Having not completed the target acquisition, Diageo suffered bad results. The annual report of this company showed that in the fiscal year ended June 30, 2015, Diageo had made provisions of $55.7 million for its investment in Halico.

With bad business results for many years, Halico's valuation now is much lower than that in a few years ago. This means Habeco will find difficulty in withdrawing capital with high prices such as price set by VinaCapital in 2011.

This may be the opportunity for Diageo to buy the shares and control the entire Halico company and then restructure. However, the alcohol market has changed a lot since Diageo first invested in Halico seven years ago such as strongly growing market size, more foreign corporations entering market or consumption trend of customers.