Santosh Nairmoneycontrol.com
Diageo plc raised its stake in Vijay Mallya’s United Spirits to 28.7 percent last Friday by picking up 35 lakh shares (a 2.4 percent stake) from the open market at an average price of Rs 2,474. That’s nearly 100 times current earnings.
A section of the market feels Diageo has had better luck this time, in that it managed to get the entire quantity of United Spirits shares it was looking to buy.
The British brewer had picked up around 20 lakh shares through the market in November last year at Rs 2,400 apiece.
High net worth individuals tracking the stock say the bid was actually for the entire 39.18 lakh shares that Morgan Stanley Asia was looking to sell. But the market got wind of the deal size and price in advance, and many traders queued up to buy the stock by placing bids at a few paise below Rs 2,400. Diageo ended up getting less than 20 lakh shares (19.67 lakh shares to be precise), while the remaining 20-odd lakh shares were picked up by a large number of bulge bracket traders.
The bulk deal section on the stock exchanges gives no details about these buyers who bit into the block of shares like a pack of piranhas.
But what makes Dalal Street so upbeat on United Spirits shares? Especially when hard-nosed equity analysts at many of the blue-blooded brokerages are bearish on the stock, saying it is overpriced relative to expected earnings growth.
Answer: it’s the expectation of Diageo making an open offer to increase its stake in United Spirits to over 50 percent at a hefty premium to the market price.
From the last two open market purchases, it appears that Diageo is not prepared to pay more than Rs 2,400-2,500 per share. Should Diageo make an open offer at that price, the prevailing market price has to be much lower for the offer to succeed. Diageo can still buy another 1.4 percent from the open market till March 31, as promoters can buy up to 5 percent from the open market every financial year under the creeping acquisition rules.
Also read: United Spirits charts plan to sell Whyte & Mackay
Market expectations of an open offer have risen after the Karnataka High Court in December declared United Breweries Holdings’ sale of 6.9 percent in United Spirits to Diageo as ‘null and void’. The matter is scheduled to be heard in the Supreme Court shortly.
CNBC-TV18 reported last week that United Spirits is working on a preferential issue to help Diageo maintain its stake above 25 percent in the event of an unfavourable ruling in the issue.
Diageo may be in no hurry to make an open offer since it already has control of the board. And under the terms of the agreement with United Spirits, UB Holdings will vote in favour of Diageo for four years, if Diageo is unable to muster a majority shareholding.
As on 31 December 2013, the UB Group owned 10.97 percent in United Spirits, with 95 percent of that holding pledged with lenders. One of the lenders sold 90, 000 shares (0.6 percent) last month, most likely because of a margin call not being met. Should the stock price be volatile going ahead, more such calls could be triggered. Unless the margin requirements are met, more of the pledged shares could be sold off in the market, reducing Vijay Mallya’s stake further.
A trader with a sizeable exposure to the stock says that it would be in Diageo’s interest that the shares are not sold in the open market. That is because since the UB group is committed to vote alongside Diageo. If these shares get sold because the lender is forcing the issue, Mallya’s backing for Diageo gets smaller to that extent.
There are three players in the business – excluding the bulls who are hoping to make money from a punt. For Diageo, which wants to buttress its shareholding power, it makes sense to up its stake at the lowest possible cost. For Vijay Mallya, who is in hock to lenders, it makes sense to maximise the price at which these shares are sold. And for the lenders, too, the higher the value of the shares the better.
It is very likely that Diageo would be looking to negotiate a deal with the lenders, so that it can get to increase its stake at a reasonable price, and as an added bonus, become the sole promoter as well of United Spirits.
And yet, whichever route Diageo tries, it may still have to pay a decent premium to increase its stake, as the market is aware of its intent.
The reason why the market is willing to accord a premium to United Spirits with Diageo at the helm is expectations of better corporate governance and a cleaner balance-sheet.
The near term event that the market is focused on is the impending sale of Whyte & Mackay, which United Spirits had acquired in 2007. Valuations vary, but it is expected that proceeds from the sale will be used to pay off a good chunk of the Rs 7,000-and-odd crore of debt United Spirits has on its books.
The only way Diageo can hope to increase its stake by not having to pay through its nose is by tiring the bulls out. That means doing nothing. But then the suspense over its complete control of the company will get longer.
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