Diageo To Launch New $1.9 Billion Offer To Raise Its Stake In USL To 55%

Diageo says it will offer up to $1.9 billion to shareholders of Indian spirits giant United Spirits Ltd. (USL) to raise its stake in the company from 28.8% to 54.8%. Diageo’s offer, slated to run from June 11 through June 24, represents a 19% premium to USL’s last closing price, and sent shares up by about 10% in today’s trading. If Diageo secures the full additional 26% stake sought with this move, it will have paid a total of $3.1 billion for its 55% interest in USL, which had net revenue of $1.8 billion in the 12 months through March 2013. Diageo already effectively controls USL through its existing stake and related governance agreements.

While a previous open offer early last year failed to gain traction with USL shareholders, Diageo is confident the new effort will succeed, given the premium offered. In a research note, Citigroup pointed out that the multiple of 32 times forward EBITDA for the new stake—compared with low 20s for most “top-of-the-range” historic spirits transactions—is high, but that Diageo can “significantly raise USL’s margins over time” from their current 11%, given that the business still derives most of its sales from relatively low-priced brands. Pernod Ricard’s India business, which skews higher-end, has margins of around 26%, Citi says.

According to Impact Databank, USL’s volumes were roughly flat at 125 million cases in 2013. Several key brands, however, were on the rise, including Indian whiskies Hayward’s (up 30% to 9.2 million cases) and McDowell’s No. 1 (up 22% to 23.7 million cases) and McDowell’s VSOP Brandy, up 19% to 2.3 million cases.

Tagged : Citigroup, Diageo, Hayward's, McDowell's No. 1, McDowell's VSOP, Pernod Ricard, United Spirits Ltd.

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