USL soars on Diageo open offer

Written by fe Bureau | Mumbai | Updated: Apr 16 2014, 09:50am hrs
The United Spirits (USL) scrip climbed more than 10% on the BSE on Tuesday, hitting an all-time high, after Diageo announced an open offer to acquire an additional 26% in the firm.

The company announced an open offer for acquisition of up to 3.7 crore equity shares of USL at R3,030 a share, amounting to R11,448 crore. The price is 18.5% premium to Fridays closing price of R2,557 a share and is more than double the R1,440 a share price Diageo had offered in the first open offer in November 2012.

The announcement lifted USL scrip to an all-time high of R2,940 on the BSE on Tuesday. The scrip closed at R2,853, gaining 11.5% over the previous day's close.

Diageo holds 28.78% in United Spirits via one of its international arms, Relay BV. This does not include the treasury stock of 2.38%. A full acceptance of the offer would take Diageos stake up to 54.78% in the company and voting power to above 65%, according to an IDFC report.

As of March 2014, the promoter group entity control held around 38.62% in the company, while FIIs held 40.14% and DIIs 3.97%, shareholding pattern updated on the BSE shows.

In 18 months, Diageo has announced a second open offer at over 2x the initial one announced in November 2012 at R1,440 a share. We believe this indicates Diageos confidence in the potential of the USL business as well as its commitment to India as a market. We do not expect a full acceptance for the offer and believe longer-term investors will wait for the premiumisation theme to play out in USL over the next 18-24 months, said a research note by IDFC Securities Research.

According to analysts, the open offer seemed attractive and even presented an arbitrage opportunity, meaning investors could buy USL shares from the market and surrender them in the open offer. Brokerage Anand Rathi believes that investors can make decent returns if the acceptance ratio for the open offer turns out to be either 67.6% or 61.5%.

Experts suggested that the USL stock is expensive, with an estimated price to earnings multiple of 161.1 for FY14.The price of the stock has more than doubled since November 2012, when Diageo first announced its intention to purchase stake in USL.

If you are an investor with a 2-3 year horizon, it makes sense to tender shares in the open offer considering the valuations one is likely to get during this period. Long-term investors, however, may choose to hold on to the shares, said a research head of a fund house.

Diageo had picked up 2.4% in USL for R866 crore in February 2014, raising its stake to 28.8%. In November 2013, Diageo had bought a 1.35% stake for R472 crore from Morgan Stanley Asia (Singapore) PTE at R2,440 per share.