Diageo open offer price 'low' for United Spirits' investors

UK-based spirits major Diageo is finally set to launch its open offer to buy an additional 26 per cent stake in United Spirits Limited by next week, said a banker.

However, the offer, to be launched at a price of Rs 1,440 a share, wouldn’t be able to garner support from minority shareholders, as today, at Rs 1,908 a share, the market price was higher, a banker said, on condition of anonymity.

Though Diageo was considering raising the open offer price, a decision on the matter hadn’t been taken yet, he added.

The launch of the open offer would culminate Diageo’s Rs 11,000-crore (Rs 110-billion) takeover of USL.

On November 9, Diageo had announced the acquisition of 27.4 per cent stake in USL from Vijay Mallya and his holding companies.

It had also announced an open offer to increase its stake to 53.5 per cent.

The deal met stiff resistance from the Securities and Exchange Board of India, owing to a ‘put’ option that gave UB Group the right to sell its remaining stake in USL within seven years.

As this was a forward contract, it violated Sebi’s takeover code. The market regulator insisted Diageo drop this clause.

It is expected the share sale would help UB Group repay a substantial portion of its loans.

Earlier, it had defaulted on loans worth Rs 7,000 crore (Rs 70 billion) to run the now grounded Kingfisher Airlines.

The loans were guaranteed by UB Holdings, which holds 18

per cent stake in USL.

Analysts say once Diageo acquires majority stake, it is likely to ensure USL records free cash flows by launching premium products, introducing best practices, improving operational efficiencies and strengthening the balance sheet.

“The strong performance of Pernod India makes us believe efficient management can deliver the desired results over time,” said a BNP Paribas analyst.

However, a few analysts say for minority shareholders, Diageo’s wholly-owned subsidiary in India that houses all its super-premium brands could be a dampener.

They add Diageo should consider using USL’s existing network for introducing its super-premium products and turn USL into a back-end company. This would have an impact on its margin recovery.

According to a conference call after the Diageo deal, it appeared in the near term, Diageo was likely to keep both companies separate; it would think of a merger only when it had controlling stake in USL and its balance sheet was in good shape.

“We expect Diageo to continue to market its super-premium products through the 100 per cent subsidiary, or possibly use the United Spirits arm for these products by paying marketing fees,” BNP Paribas analysts Alok Dalal and Vijay Chugh wrote in a report dated March 6.

Other downside risks include possible royalty payments, potential write-offs/impairment charges and adverse movement of raw material prices.