CLSA on Monday upgraded United Spirits to "buy" from "sell," saying its deal with global spirits major Diageo to sell a majority stake would be a "game changer."
On Friday, after months of speculation, United Spirits, United Breweries Holdings and Diageo, announced a complex deal , which will see Diageo initially acquire 27.4 percent stake in United Spirits for Rs 1,440 a share (19.3 percent from UB Holdings and several United Spirits subsidiaries and preferential allotment of new shares amounting to 10 percent of post-issue enlarged share capital).
This will then trigger an obligation on Diageo to launch an open offer to acquire 26 percent stake held by shareholders. On completion of the share purchases and if the open offer is fully subscribed then Diageo will hold 53.4 percent of United Spirits, at an aggregate cost of Rs 11,166.5 crore.
"We see this deal as a game changer for United Spirits as this would reduce debt levels, significantly boost earnings, bring financial discipline and operational advantages over the long term," CLSA's Vivek Maheshwari and Bhavesh Shah said.
United Spirits currently has a debt of over Rs 8,000 crore due to the expensive acquisition of Scotch whisky maker Whyte & Mackay, rising working capital and capital expenditure. This has hurt earnings due to high interest costs.
"In the last few years, high gearing has impacted United Spirits' earnings; for example, in FY12, its Rs 1,100 crore EBITDA (earnings before interest, taxes, depreciation and amortization) translated into earnings of just Rs 240 crore due to high interest expense. The deal would result in a substantial reduction in interest cost driving a strong growth in EPS (earnings per share) in the near-term, despite equity dilution," Maheshwari and Shah said.
CLSA has upgraded its FY14, FY15 EPS estimates on United Spirits by 35-40 percent and also raised its target price to Rs 1,800 a share.
Also Read: United Spirits hits new high as street cheers Diageo deal
Kimg Eng Securities India, a unit of Malaysia's Maybank Investment Bank, had also upgraded United Spirits to "buy" from "hold" earlier in the day.
"For the medium term, upside to United Spirits will emerge from Diageo's premium global brands and export opportunity. With Diageo as its promoter, investor concern on corporate governance and debt will disappear, triggering a re-rerating in the stock.
Unied Spirits shares were up 24.4 percent at Rs 1,691.90 in afternoon trade on NSE. The stock had hit a new 52-week high of Rs 1,729.90 earlier in the session.
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