Diageo Plc to Hike Its Stake In United Spirits

The world's largest spirits company Diageo Plc has announced to acquire an additional stake of 26% in United Spirits. At present, Diageo holds 28.8% stake in the company via its international arm Relay BV and if the open offer is successful, Diageo's stake in United Spirits will increase to 54.8%. Following this news, the shares of the company started trading at an increased price of Rs. 2858.60, thereby showing  a hike of 11.80% on the BSE.

The offer price is Rs. 3030 per share, which is at 18.5% premium of its last closing price. On Friday, the stock closed at Rs 2557 per share. The stock price of USL reached its 52-week high on January 10, 2014 at Rs 2816 per share. It comes to notice that the offer price is 7.60% higher than the 52-week high of the company. Earlier, Diageo had bought a 1.35 per cent stake in November 2013 for Rs 472 crore from Morgan Stanley Asia (Singapore) PTE at Rs 2440 a piece. Also, the company had offered to acquire shares which were around Rs 2400 in November 2013 and at Rs 2474 in January 2014, but the offer failed to receive expected responses from the investors. However, this time around the offer is expected to get positive responses. Interestingly, this price is a 22.5% premium to the price at which Diageo last acquired USL shares on 31 January 2014.

Taking cues from previous offers, we are of the opinion that this time the shareholders would like to free their hands in the market as the offer is higher than the market expectation. The scrip of United Spirits is trading at a P/E of 116.08x, whereas the industry is trading at a P/E of 64.30x, clearly stating that the stock of the company is already overpriced.