The rally in share price of Vijay Mallya promoted United Spirits Ltd. (USL) was halted today as research analysts cautioned investors from betting too high on the counter.
The share that rose from a monthly low of Rs 799 on the Bombay Stock Exchange (BSE) to touch a high of Rs 1,294 in just around two weeks, fell by 4.6% today as research firm Macquarie advised investors to book profit.
USL has seen a sharp rise in past couple of weeks as the company confirmed it was in talks with Diageo, world's largest spirit maker, to sell a stake. Key point is that both were involved in similar discussions three years back too, but they couldn’t conclude the deal, said Macquarie.
"Our analysis of other acquisitions in the spirits industry indicate a potential deal value for USL in the range of Rs1,327-Rs1,555 per share. We think the risk-reward is unfavourable as the current stock price is implying 75% probability of the deal at the higher end of the valuation band. If the deal doesn’t happen we see 65% potential downside from current levels," said Macquaire.
Indian research firm CNI Global says if the deal goes through, Diageo will also have to take over around Rs 3,600 crore (Standalone). Also, the research analyst said that consolidated debt which is over Rs 8,000 crore will make it more difficult for the deal to go through and hence USL promoters may not get the desired price they are asking for, which may bring down the deal value.
"The debt of the company makes share price appreciation less likely from the current levels. Even if the deal goes through, the valuations may not be too attractive for USL, which is why the run-up in share price is not justified. We belive the deal and open offer could be below Rs 990, considering Diageo will pay $ 640 million for 27.78% stake from promoters as is being talked about, and share price has to correct," said CNI.
The $ 640 million for 27.78% stake, which was reported by new channels a few days ago, values the company at Rs 12,786 crore. Accordingly, the per share cost comes to Rs 983, said CNI.
Also, last time when Diageo was in talks with USL promoters, they had offered to buy promoter stake for Rs 875 in 2008-09. Then, the United Breweries Group holding in USL was 36.57%, which has now fallen. In fact, the level of shares pledged has increased.
Macquarie said it does not foresee any immediate synergies between Diageo and USL. in India given the divergent profile of their respective brands. Diageo would provide USL with access to brands in the premium segment but it is very small in Indian market, said Macquarie.
"While the Indian spirits market is attractive due to its growth potential, there are inherent challenges in the business as state governments control distribution, retail and pricing, none of which would change with Diageo coming on board."
A key positive for the minority shareholders will be likely 50-60% reduction in net debt due to fresh equity infusion (10% dilution), treasury share sale, stake sale in Whyte and Mackay and sales of investments in UBL.
