Diageo Plc's open offer for 26 per cent of United Spirits Ltd (USL) shares is sure to get more expensive. With the USL share price zooming 35 per cent on Monday - from Rs 1,359 to Rs 1,834 -the offer price of Rs 1,440 would seem meaningless for investors.
Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities, said: "Given the spurt, it looks unlikely that anyone will tender shares in the open offer."
The stock price rise of 35 per cent is the highest on the next day of an open offer announcement in over half a decade. USL's market cap rose by Rs 6,211 crore to Rs 23,995 crore.
What helped the mood was the 'buy' call given by several research houses, who termed the deal with Diageo a game changer. While Morgan Stanley has put the target price at Rs 1,905, CLSA's price target is Rs 1,800. Religare has set the target price at an even higher Rs 2,100.
Research houses are gung-ho about the fact that the deal will infuse Rs 3,300 crore into the books of USL, thereby bringing down the debt from Rs 7,800 crore to Rs 4,500 crore. "The group believes USL's holding in United Breweries is non-core. It may even sell Whyte & Mackay which could turn USL debt-free," said Vivek Maheshwari and Bhavesh Shah in the CLSA report. They added that by factoring in lower interest cost and equity dilution, the earnings-per-share estimates for FY14-15 would rise 35-40 per cent.
"As the management control will shift to a multi-national company (MNC), the stock will be re-rated and the valuation is expected to be 1.5-2 times of the market. Look at MNC stocks like Nestle, ITC, Cadbury - all their valuations are 2-2.5 times of the markets," said Piyush Garg, chief investment officer, ICICI Securities.
However, Macquaire struck a cautious note. While admitting that Diageo India (Diageo's existing entity) would gain the most from the structure as it was similar to P&G, where an unlisted entity was used to launch new products in emerging, fast-growing and premium categories, the report said inefficiencies arose out of government control in the distribution channel.
Investors would feel short-changed by the deal after Monday's surge in the stock price. Experts said some price revision was imminent. From a taxation angle, selling the share through an open offer attracts 30 per cent capital gains tax.
Experts also say that the stock price correction may not go below the open-offer price. "The premium this stock is getting is because of the new management and not the deal. It may not correct below the open-offer price," adds Thunuguntla.