Diageo deal positive for USL, stock may be rerated: Angel

Diageo, and Vijay Mallya-owned United Breweries Holdings and United Spirits on Friday announced agreements under which Diageo would acquire a majority stake in United Spirits.

In an interview to CNBC-TV18, V Srinivasan, FMCG analyst, Angel Broking says it has come in line with the expectations. At Rs 1,440, he says, the stock has run up considerably. “It is trading at more than 30 times of its FY14 earnings estimated as of now. With the Diageo coming in, a lot of things are clear about the company. Rerating should happen now,” he adds. Below is the edited transcript of his interview on CNBC-TV18. Q: What is your view on United Spirits, as a stock, after the announcement of the deal? A: Yes. It has come more in line with what we are expecting. But I am yet to see the contours of the deal, as of now. It, as of now, is going to be a mixture of the stake sale by promoters and some amount of fresh money coming into the company. That will certainly reduce the debts. It is going to be favourable for the company. Q: Do you think this 10 percent preferential allotment is in line? Would the street have liked more of a preferential allotment? That would have directly gone in reducing the debt on the books of United Spirits. Is 10 percent in line? A: If you ask me personally, it was always that UB Group or Mallya would not have liked to concede more in this family grill or crown of this company. It is always expected that it is not going to be more. This is actually more in line, 15 percent status. Q: Do you see the open offer being successful? How much do you see Diageo actually acquiring by way of the open offer? Do you see shareholders tendering at Rs 1,440? A: At Rs 1,440, yes, the stock has run up considerably. It is trading at more than 30 times of its FY14 earnings estimated as of now. With the Diageo coming in, a lot of things are clear about the company. They will no longer be affected by the problem in Kingfisher. That is a big positive. So, in the long-term, there is a lot more clarity about United Spirits. Q: What would be the next step if Diageo does not get a lot by way of an open offer and does not get a majority shareholding in United Spirits? A: We need to see how many of the shareholders are going to accept the open offer. But still they are getting into a foothold in Indian markets. That is a positive for Diageo. Q: You spoke about United Spirits currently trading at 30 times its FY14 EPS. Do you see a possibility of rerating? A couple of people said that because now it will be a cleaner management structure, global business practices, so there is a case perhaps for a valuation rerating. Would you be in that camp? A: Rerating should happen now. Q: The debt is around Rs 8,600 crore on the books. Taking the price of Rs 1,440 and if you take into the consideration the overall preferential allotment, how do you see the debt coming down? How much of that do you think would be factored into UB Holdings? A: Right now, they have got around 12 crore of outstanding shares. If my rough estimates hold right then United Spirits should be getting somewhere around Rs 2,000 crore. That should be the amount of fresh money coming into the company. So, the debt will come down by the same amount, say around Rs 2,000 crore. Q: Any tax risk that you are seeing in this particular transaction, considering another reason why the preferential allotment has happened is to bring down a certain amount of tax risk. What are the potential risks that you can see? A: I will not be able to comment, as of now, on the taxation point of view. Q: Just a quick word on the joint venture agreements that have been formed. I am not sure if you are aware of the details, but Vijay Mallya and Diageo have formed separate joint venture agreements, as far as the subsidiaries are concerned. What is your view? What could be the reason behind that? What implication that has on the partnership between the two companies? A: Since the details are not there, I am not sure whether the JV is in the name of United Spirits or it is with some other United Breweries Group company. If United Spirits is going to be involved then there could be some amount of benefits for the company. But if some other UB company is going to be in joint venture then it might now favour United Spirits that much. Q: In the event Diageo does not acquire a majority interest, it is likely that a minimum shareholding of 25.1 percent together with the voting arrangements and other governance arrangements agreed with the UBHL Group and Mallya would enable Diageo to reflect the results of USL in its consolidated accounts. What would you make of that statement? A: It is pretty difficult to comment as of now. Q: Any kind of an indication of what the voting arrangements would be like or the new management structure? A: If Diageo is going to get the majority stake then board membership would be more dominated by Diageo nominated persons  in that case. UB Group will not have the hold of the board in that case.