As per media reports, Diageo is likely to acquire up to 25% in United Spirits (USL)- 12% promoter stake, 3% treasury stock and 10% through preferential allotment. We believe the deal, if inked, will be positive for USL as it will strengthen the company’s presence in the premium portfolio, where it has been losing out to key competitor Pernod Ricard. Funds infused via the deal will also help deleverage the balance sheet. Foreign management could improve operational efficiency and boost margins, since current promoters are focusing more on other stressed group companies. USL will also enjoy benefits of scale by setting up bigger manufacturing plants. Further, it could gain access to some international (emerging) markets. Inspite of a sharp appreciation in share price over the past two months, we expect a re-rating whenever the deal is inked (USL valued at 2.2x FY13E EV/Sales currently, significantly lower than peers). Maintain ‘HOLD’.
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Likely structure of potential deal
As per media sources, possible structure of the deal could be: (1) promoters could sell 12% to Diageo who would further pick up 3% stake by buying the company’s treasury stock; (2) USL will then make a preferential allotment to Diageo up to 10% (followed by an open offer), which combined will give the latter 25% stake.
Outlook and valuations: Deal the only trigger; maintain ‘HOLD’
Given the low EV/Sales at 2.2x FY13E (cigarette major ITC trades at 6.5x), the stock could further re-rate despite a sharp movement in the past two months. However, the deal going through is the key trigger. At CMP, the stock is trading at 46.2x FY13E and 33.3x FY14E. We maintain ‘HOLD’ and rate it ‘Sector Underperformer’.
Regards,
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