United Spirits: Weighed down by other factors

In 2007, when United Spirits (USL) acquired Whyte and Mackay (W&M), it was considered a good fit as it filled the missing links in USL's portfolio. W&M's established brands and strong presence in European markets gave USL a huge advantage. But, this was a leveraged buyout. The debt pertaining to the deal, which was valued at enterprise value of Rs 9,480 crore including Rs 4,050 crore of equity, was designed to be funded by W&M's cash flows. However, due to the acquisition debt and USL's own needs, consolidated debt continued to rise. So, although USL achieved scale and W&M continued with its good show, a large part of earnings was used for paying interest costs.

But, with Diageo planning to sell W&M to meet regulatory requirements, analysts expect USL's balance sheet pressure to ease. "We believe Diageo's sale of W&M business will be positive for USL as it will reduce debt to the extent of Rs 3,267 crore and, consequently, cut interest cost by Rs 130-150 crore annually. Also, it will bring down inventory level for USL, thereby improving working capital cycle," said Bharat Chhoda, analyst at ICICIdirect.com.