Diageo deal lifts United Spirits stock 35%

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Riding on the back of the United Spirits-Diageo deal, the stock of United Spirits touched a new high. The scrip jumped by about 35 per cent on the bourses. It closed at Rs 1,834.60, up 34.93 per cent on the Bombay Stock Exchange (BSE). The stock touched an intra-day 52-week-high of Rs 1,877.15 on Monday.

Analysts have trumped the deal as a game changer for United Spirits Limited (UNSP). Several brokerages and financial institutions have given a positive re-rating to the stock.

On Friday afternoon, Diageo confirmed that it will be acquiring 53.4 per cent of Vijay Mallya-promoted United Spirits. The stock was up only marginally on Friday. However, on the back of analyst reports, there was much positivity in the markets leading to the stock soaring on Monday.

Medium term upside

A report by Kim Eng says, “For the medium term, upside to UNSP 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-rating of the stock.” The financial institution has upgraded the stock to ‘buy’ from ‘hold.’

The deal is extremely important for Diageo as well. Post the deal, India will become the second largest market for Diageo. CLSA has also raised its rating of the United Spirits stock to ‘buy.’ The deal would help United Spirits to ‘de-leverage the balance sheet and improve earnings.’ CLSA also said that, “Diageo’s global expertise could help in several areas like portfolio premiumisation, efficient sourcing, brand rationalisation, etc. which could better the operating margins.”

Religare sees the deal as a ‘big re-rating’ on the cards. “It would help re-rate the company as it eliminates the key overhang of UB group debt concerns. It would also allow UNSP to compete more effectively at the premium end of the Indian made foreign liquor market where Diageo could bring in its expertise,” said a report from Religare.

Analysts see that the deal as a positive for minority shareholders and the cash infusion will help improve the capital structure of the company.

(This article was published on November 12, 2012)
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