United Spirits jumps 35 pct as Diageo deal seen positive

Last Updated: Mon, Nov 12, 2012 12:00 hrs

United Spirits posted its biggest single-day s hare gain since at least 1995 o n Monday after its stake sale to Diageo spurred upgrades from several analysts, who called the deal "transformational" and a "game changer" for the Indian liquor maker.

Morgan Stanley, J.P.Morgan and CLSA raised their ratings to the equivalent of a buy, saying United Spirits will substantially cut its debt and improve its profits after its deal to sell a 53.4 percent stake to Diageo for $2.1 billion.

The jump of as much as 37.8 percent on Monday added around $1.1 billion (61.8 billion rupees) to the market value of the company controlled by Indian businessman Vijay Mallya after the glowing research reports.

The liquor maker had gained 1.3 percent on Friday when the deal was announced.

"USL is now a stock for every portfolio, we believe," Morgan Stanley said in a note on Monday, adding the deal priced United Spirits "significantly higher" than its base-case value.

The U.S. investment bank raised its rating on United Spirits to 'overweight' from 'equal-weight', while also raising its price target to 1,905 rupees from 1,000 rupees.

Under the deal announced on Friday, Diageo would first buy a 27.4 percent stake from United Spirits' founders at 1,440 rupees per share, and then launch a mandatory open offer for the remainder.

The deal would pair together the global maker of Johnnie Walker with a domestic company owning a portfolio of spirits including the popular McDowell's whiskey in India.

CLSA raised its rating to 'buy', while setting a new target price at 1,800 rupees, saying the deal would benefit United Spirits by reducing debt levels, increasing earnings, imposing financial discipline and providing operational advantages.

The brokerage estimated Diageo would inject around 33 billion rupees ($602.68 million) into United Spirits, helping pare down debt of around 78 billion rupees. CLSA also raised fiscal 2014-15 earnings-per-share estimates by 35 to 40 percent.

"We see this deal as a game changer for UNSP," CLSA said in an email to clients, a copy of which was seen by Reuters.

In a report headlined "transformational deal," J.P.Morgan raised its rating on United Spirits to 'overweight' from 'neutral', while raising its price target to 1,645 rupees from 720 rupees.

"This will likely help increase focus on premiumisation, rationalise expenditure and exploit synergies between the two companies leading to better profitability and support re-rating for the stock," said the bank in a note dated on Sunday.

United Spirits shares rose 34.7 percent to 1,832.95 rupees, after rising to as much as 1,874.60 rupees, their highest since Jan. 18, 2008.

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