'Over-optimism pumping United Spirits' shares'

Diageo tells CLSA it is not trying to talk down the price for a successful open offer, which it hopes to do in end-March

There was an element of ‘over-reaction’ and ‘over-optimism’ built into the United Spirits stock price today, said Catherine James, head-investor relations at Diageo, which recently announced its acquisition of the Vijay Mallya company.

In an interview with broking firm CLSA, she denied speculation that the Diageo management was talking down the outlook for United Spirits to bring down its stock, to make their open offer successful.

Diageo will control United Spirits irrespective of the open offer outcome as part of the deal with the UB Group, said James. She was responding to a CLSA query on the way ahead for Diageo if investors did not tender shares at the open offer price of Rs 1,440, as the current market price is way ahead. United Spirits’ shares shed 2.8 per cent to Rs 1,758 on Tuesday.

“Irrespective of whether we are 51 per cent or not, we could still be consolidating United Spirits,” said James to CLSA, which published the interview in a note to clients.

The UK-based Diageo had agreed to buy 53.4 per cent stake in United Spirits in a structured deal, signed in early November. Diageo was to acquire 27.4 per cent stake through a combination of buying the existing promoters’ stake and a preferential share allotment. In the first part of the deal, the UB Group sold about 19.3 per cent in United Spirits to Diageo at 1,440 a share. Then, United Spirits was to make a preferential allotment of shares to help Diageo’s stake cross 25 per cent and spark the open offer to public shareholders of United Spirits, amounting to 26 per cent of the company’s equity at Rs 1,440 a share, the price at which it is buying the promoters’ stake.

The open offer was earlier scheduled to start on January 7 but was postponed as the Securities and Exchange Board of India objected to the ‘put option’ clause in the deal, which allowed the UB Group to sell its shares in United Spirits to Diageo at a later stage. The market regulator said this clause amounted to adding a forward contract to the deal, which was not permitted under Indian law.

James, in the CLSA interview, confirmed that Sebi was opposing this clause but denied any other reason for the delay in the open offer. “At the time of our agreeing the transaction, there was talk that Sebi was considering a proposal to allow for a forward contract in such agreements but this has not come through,” said the CLSA report, quoting James.

Diageo said the deal might not be closed before the first quarter of 2013. “We now are hopeful that key approvals should come through by March or so and we should be able to launch the mandatory open offer by end-March,” said James.

Diageo sees a ‘disconnect’ in estimates that it has built in the acquisition model for United Spirits, which is lower than what some analysts and investors expect from the company.

“Since we hope to become significant shareholders of United Spirits, it is our fiduciary duty to set the expectations right. We do not want a case at the time of our earnings release that our shareholders are disappointed. It would be a breach of our fiduciary duty and, in fact, illegal if we try to undermine or under-report earnings of the companies where we have investments,” said the CLSA report, quoting the Diageo official.