Diageo announces Rs 1,440/share open offer for 26% stake in United Spirits

Diageo announces Rs 1,440/share open offer for 26% stake in United Spirits
British spirits company Diageo Plc announced an open offer to acquire a 26 per cent stake in Indian peer United Spirits for Rs 1,440 per share.  According to the offer document posted in a newspaper, the tendering period commences on 7 January 2013 and will run until 18 January 2013.

Nikhil Vora, managing director at IDFC Securities, told NDTV that the Diageo open offer was unlikely to succeed because investors are not looking to exit United Spirits right now. "Many investors have been on the fence here and that will change drastically... there will be a fair bit of investor appetite... I don't really see Diageo getting anything out of the open offer," he added.

The acquisition will lead to transformational changes in the liquor Industry and Diageo's "premiumization" focus will increase margins, Mr Vora said.

The deal will start a new phase of re-rating for United Spirits, he said, adding that United Spirits will could potentially become the most important consumer brand in the country.

"I am structurally bullish on United Spirits," he said.

Mr Vora expects "strong value creation" with United Spirits posting a net profit of $200 million-$250 million (Rs 1,371.5 crore) in the next couple of years. "This is the time to enter United Spirits rather than wonder
when to exit."

IDFC Securities has a "outperformer" rating on the stock, and is reviewing the target price.
On 9 November, the companies jointly announced that Diageo will acquire a controlling 53.4 stake in Vijay Mallya-promoted United Spirits for Rs. 11,166 crore (nearly $2 billion). Mr Mallya will continue in his current role as chairman of United Spirits. (Read: Diageo strikes Rs. 11,000 crore deal with Mallya's United Spirits)

“This represents a 20 times multiple of United Spirits EBITDA (earnings before interest, taxes, depreciation and amortization, or a measure of the company’s operating cash flow) for the year ended March 31, 2012 and the transaction would be EPS (earnings per share) accretive in year 2 and economic profit positive in year 6 assuming a 12 per cent WACC (weighted average cost of capital)," according to the deal statement.

Shares in United Spirits ended up 0.6 per cent at Rs 1,762, higher than Diageo's offer of Rs 1,440 a share to minority shareholders. The sharp jump in the stock has clouded the outcome of the tendering process, analysts said.

United Spirits shares have risen more than 30 per cent since the announcement of the deal on November 9.

The Diageo stock hit a new 52-week high yesterday at  1,833.5 pounds. The company's share price has risen 42.39 per cent over this period.

United Spirits is expected to deleverage itself using the cash (Rs. 3,300 crore received via the deal), Mr Mallya had said after the deal announcement. UB Holdings will get Rs. 2,400 crore from the stake sale.

The deal is subject to regulatory approval.

The companies are also examining the possibility of extending the joint venture to other emerging markets, Mr Mallya had said, and will seek to launch as many United Spirits brands in these markets as possible.

A Diageo official had called the deal a strategic move to transform the company’s position in India.

United Spirits is India’s largest liquor company with a market value of $3.2 billion (Rs. 17,437 crore).

Diageo, the world’s largest spirits company, is the maker of Johnnie Walker whisky, Guinness beer and Smirnoff vodka, among others.

The deal will ramp up Diageo's presence in India, the world's largest whisky market. The company is expanding into fast-growing emerging markets with recent acquisitions in Brazil, China and Turkey and expects half of its turnover to come from these markets by 2015 compared to nearly 40 per cent currently.

The purchase, which concludes an on-again, off-again courtship that began in 2008, would be the biggest inbound Indian merger and acquisition deal since British oil firm Cairn Energy sold a majority stake in its Indian business to Vedanta Resources last year.

(With inputs from Thomson Reuters)

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