Shares of United Spirits jumped over 16 percent to hit a new high of Rs 1,632.55 in morning trade on Monday, as the street gave a big thumbs up to its deal with Diageo, which will see the world's largest spirits company acquire a majority stake in the Vijay Mallya's crown jewel.
On Friday, after months of speculation, United Spirits, United Breweries Holdings and Diageo, announced a complex deal , which will see Diageo initially acquire 27.4 percent stake in United Spirits for Rs 1,440 a share (19.3 percent from UB Holdings and several United Spirits subsidiaries, and preferential allotment of new shares amounting to 10 percent of post-issue enlarged share capital).
This will then trigger an obligation on Diageo to launch an open offer to acquire 26 percent stake held by shareholders. On purchases of the share purchases and if the open offer is fully subscribed then Diageo will hold 53.4 percent of United Spirits, at an aggregate cost of Rs 11,166.5 crore.
Kimg Eng Securities India, a unit of Malaysia's Maybank Investment Bank, upgraded United Spirits to "buy" from "hold," terming the deal as a game changer.
"For the medium term, upside to United Spirits will emerge from Diageo's premium global brands and export opportunity. With Diageo as its promoter, investor concern on corporate governance and debt will disappear, triggering a re-rerating in the stock," it said.
Once the deal is done, around Rs 3,300 crore will flow into United Spirits, a large part of which will be used to repay its huge debt, which is currently at over Rs 8,000 crore.
"Debt will come down substantially and that will lead to significant reduction in interest costs," said Manish Jain and Anup Sudhendranath of Nomura Financial Advisory and Securities India.
It will also gain from Diageo's global presence and premium brands, at a time, there is a lot of premiumisation happening in the Indian market too.
"The deal will be positive for United Spirits as it will strengthen the company's presence in the premium portfolio. We believe the foreign management could improve operational efficiency and boost margins. United Spirits will also enjoy benefits of scale by setting up bigger manufacturing plants and could gain access to some international markets," said Abneesh Roy and Hemang Gandhi of Edelweiss Securities.
Nomura and Edelweiss, both, have a "neutral" and "hold" rating respectively on United Spirits.
At 9:45 hrs, United Spirits shares were up 16.4 percent at Rs 1,584.05 on NSE. As of Friday's close, the stock had gained over 18 percent since United Spirits and Diageo announced on Sep 25 that they were in discussions for a possible deal.
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