Diageo stocks $2.3 bn ahead of open offer for United Spirits

Equity analysts say proposition attractive, worth considering

Diageo, the London-headquartered global spirits major, is stocking on reserves by as much as $2.3 billion, ahead of the proposed second open offer to acquire a 55 per cent majority stake in India's largest spirits company, United Spirits (USL).

Diageo already has strategic management control of USL, with its current stake of close to 29 per cent. It wishes to start its second open offer during mid-June. If fully tendered, it will cost Diageo as much as about Rs 11,500 crore for the additional 26 per cent stake, which it is targeting.

The global spirits major, famous for its Johnnie Walker scotch and Smirnoff vodka, has said it plans to sharply increase its revenues from emerging markets and USL is expected to play a key role. Senior management officials of Diageo had earlier told Business Standard they were looking to gain absolute control over USL as they want to share the growth in emerging markets with their global shareholders as well.

According to information available, Diageo will launch and price its €1.7-billion fixed rate euro-denominated bonds under its European Debt Issuance Programme. The issuer of the bonds will be Diageo Finance Plc, with payment of principal and interest fully guaranteed by Diageo Plc. The issue consists of €850 million of bonds due May 2019 with a coupon of 1.125 per cent and €850 million of bonds due May 2026 with a coupon of 2.375 per cent. Diageo has officially maintained this is for general corporate purposes.

Diageo officials had explained earlier that they'd be relying on existing cash reserves and debt to fund this open offer for USL. Diageo, as of its past financial year data, has free cash flow of $2.5 billion and its net debt to Ebitda (earnings before interest, taxes, depreciation and amortisation) ratio is at 2.4x. Diageo is confident this second open offer will be accepted better than its first open offer during early 2013 when it failed miserably, as the USL stock had firmed up aggressively.

Deirdre Mahlan, chief financial officer, Diageo Plc, explained in a recent interview with Business Standard why they were confident on this new offer. "During our first open offer in late 2012 and early 2013, the USL stock re-based on the market's perception of the benefits of Diageo's management and control of the business. That is now embedded in the shares. Second, there were assumptions on how the United Spirits' debt and Whyte & Mackay's monetisation would be handled. These aspects, too, have now been factored in. On top, all consumer goods stocks in the Indian markets have been re-rated and USL is trading in that range. We see the offer of Rs 3,030 a share as an attractive one," she had detailed.

Noted brokerages, including Citi Research and Kotak Institutional Equities, are also urging the stockholders of USL to look seriously at the open offer and tender their shares.

Jamshed Dadabhoy and Aditya Mathur, analysts with Citi Research, wrote in a recent report that the open offer was an attractive exit opportunity.