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INDIA/UK: United Spirits' price tag "full, but fair" for Diageo - analyst

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Diageo's offer for a 53.4% stake in United Spirits is “relatively full” compared to other spirits deals but will be “fair” if high Indian import duties are cut, according to an analyst. 

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Bernstein Research said the group's INR111.7bn (US$2.05bn) bid, announced on Friday (9 November), is around 20 times United Spirits EBITDA for the past 12 months. It also noted that India has “an exceptionally difficult regulatory environment” that includes a 150% duty rate on Scotch imports. 

But, Bernstein said the bid figure is “probably fair given the option value on Scotch if and when tariffs fall on imported liquors”. 

Nomura said that a cut in duties could add around US$400m to the overall Scotch profit pool in India, with Diageo “in a good position to capture the lion’s share”. 

It added: "We see very significant opportunity to add value through premiumising local spirit and leveraging the distribution platform for international spirits, especially Scotch whisky.”  

However, Bernstein flagged that Diageo is subject to the US Foreign Corrupt Practices Act and “may choose to walk away from transactions which do not pass this very high hurdle rate of corporate governance”. 

“As a result, we expect that in the first year or two of ownership, the USL business may well shrink to a more sustainable core,” it added.  

Looking ahead to further Diageo M&A, Nomura estimated that its net debt/EBITDA is “not stretched” at around x2.1. 

“This leaves headroom for further deals," the company said. "We estimate that a purchase of 100% of the Cuervo Tequila business would increase this leverage to  around x2.5 net debt/EBITDA.”


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