Diageo hopes to be more successful than its last tender offer

Diageo hopes to be more successful than its last tender offer

As expected, Diageo has stepped up its bid to take majority control of India’s United Spirits Ltd (USL). The UK-headquartered company has launched a tender offer for a further 26% stake in the UB Group unit, which, if successful would raise its stake to around 55%.

But, will the deal be worth it?

The bid for the new chunk would see Diageo pay out around US$1.9bn - a multiple of a staggering 38x United Spirits’ annual EBITDA. Historically, multiples for spirits deals are in the low-20s of EBITDA.

Analysts agree the USL figure is high. Citi Group noted the multiple is “significantly above” what Diageo paid for its initial stake last year.  Analysts at Raymond James, meanwhile, have branded the price “expensive”. And, Bernstein calls the multiple "eye-watering... by any measure". 

But, market watchers are confident the deal will have plenty of long-term benefit, considering the potential in India's growing spirits market. “Diageo is doing the right thing, given the very significant long-term upside for the Indian spirits market and the opportunity, we believe, to significantly raise USL’s margins over time from around 11% today (excluding Whyte & Mackay), as Diageo refocuses the portfolio towards the high-end and fully integrates the business,” says Citi. 

The note adds: “In the broad scheme of things, we don’t think US$1.9bn ... is an outrageous price to pay to ensure that its shareholders get the majority of the long-term upside.”

Raymond James also notes that USL’s strong position and distribution network will be “good leverage for Diageo’s spirits brands”. 

However, the Smirnoff producer ought not to start counting its chickens just yet. A similar tender offer last year was far from successful: Diageo secured just 0.4% of USL’s capital as the price proposed was below the Indian firm’s share price.

But, Citi analysts sense more positivity from the company now. “We believe management is quite confident the offer will succeed this time,” the note says.

Bernstein also strikes a positive note. "With USL's shares closing at approx 6% below the offer, it would appear that the tender is likely to succeed," it says.