Diageo’s move to snap up a majority stake in Vijay Mallya’s United Spirits (USL) has got some extra momentum after the market regulator gave its green light to the former’s proposed open offer.
The Securities and Exchange Board of India (Sebi) has cleared the Rs5,441.07 crore open offer by Relay BV, a wholly-owned subsidiary of Diageo, to take up to 26% stake from public shareholders of USL. The regulator’s website showed Sebi issued its final observations on the open offer on January 31.
The mandatory open offer is the final stage for completion of Diageo-United Spirits deal worth over Rs11,000 crore. The British spirits major, which had struck a deal with the beleaguered UB Group to acquire a 53.4 stake in USL in November, has already acquired 27.4% through a combination of share purchase from promoters and preferential allotment.
The open offer, which was scheduled to open in the second week of last month, had got delayed, pending approval from regulators. Sebi apparently was not particularly comfortable with specific provisions in the purchase agreement relating to put options and preferential allotment of shares which the companies may have sorted out. The deal, however, is still awaiting clearance from the Competition Commission of India.
USL stock reacted positively to this news, jumping as much as 4% during the day before closing at Rs1,894.95, up 2.11%, on the BSE. The company’s solid results where profits thumped the Street estimate by 6%, mostly aided by higher other income and slight margin improvement, only helped the cause.
Analysts feel the deal with Diageo will prop up earnings for the company. “The Diageo deal, along with potential monetisation of non-strategic investments in United Breweries, is expected to improve earnings, which are currently suppressed due to higher interest costs,” wrote Amit Mishra and Priya Ranjan, analysts at Macquarie Securities, in a report on Tuesday.
As part of it broader gameplan, USL has been focusing on the premium segment to boost margin. This segment notched up the highest volume growth of 29% in the October-December quarter. The regular segment, also the mass one, has seen a decline of 2% in the last quarter.
The company is also focussed on costs and maintaining profitability by keeping a lid on advertising and marketing expenses and other related spends. Going ahead, the key risk to watch out for is the volume growth in the alcohol market, which has been muted for over a year now.
