Street unperturbed by HC terming Diageo's 7% USL stake buyout void

Analysts at this point do not see any financial implications of the HC order on the company

The share price of United Spirits (USL) has seen significant re-rating after it was known that Diageo was interested in buying a sizeable stake in the company. As the deal progressed, the stock saw a huge increase in interest as the Street believed that with the new management, there would be huge synergies in terms of efficiency, perception and debt reduction, leading to significant improvement in earnings of United Spirits.

Meanwhile, though the deal with Diageo is considered to be positive, the markets have been fearful about this getting concluded. After the recent news of UK's fair trade regulator raising concerns over the deal, now the Karnataka High Court has put another spanner in the works. It has said Diageo's buyout of shares (about seven per cent stake) from UB Holdings is void. Market experts believe the news will have a negative impact on the stock in the short term.

"The stock might react negatively. We might see the stock falling for may be for two days but I think that will be an opportunity for long-term investors to buy the stock because I think this is not going to be a major issue considering that the same could be challenged in the high court," said A K Prabhakar, senior vice-president, Equity Research, Anand Rathi Financial Services.

Analysts at this point do not see any financial implications on the company but if the deal does not go through, it will pose a threat to the financial performance of the company, as well as sentiments because there has been a huge build-up of expectations.

"The share prices might fall on Monday but I do not think this is going to have a major impact. If that is the case, Diageo can buy from the market or ask Vijay Mallya to give more shares from his holding. They also have the option to buy more shares through the open offer route. Diageo will not let this opportunity go," said Manish Sonthalia, senior vice-president & head - equity portfolio management services, Motilal Oswal Asset Management.

With Diageo coming on USL's board and given the change in management, the Street is expecting that the company will benefit because of the common synergies, strength of balance sheet, and better governance.

Additionally, Diageo, because of its global practices, could add more in terms of efficient management of capital and operating performance driving improvement in the return ratios. Because of internal restructuring, the Street is expecting the return on equity to rise from 5.6 per cent in FY14 to 10.7 per cent in FY15. However, this does not include the benefit that could accrue from the likely debt reduction which could take place in case its wholly-owned subsidiary, Whyte & Mackay, is successfully divested at a reasonable price.