United Spirits Jumps as Diageo Agrees to Buy Stake

United Spirits Jumps as Diageo Agrees to Buy Stake
Bottles of United Spirits Ltd. McDowell Signature, clockwise from top, Royal Challenge, and Antiquity whiskeys are displayed on the shelves of a liquor store in Chandigarh, Punjab, India. Photographer: Sanjit Das/Bloomberg

United Spirits Ltd. surged by a record in Mumbai trading after Diageo Plc said it will buy a controlling stake in India’s largest distiller for $2.04 billion.

United Spirits climbed 35 percent to 1,832.95 rupees, the biggest gain since its listing in September 2001. The stock was the biggest gainer on the 10-member BSE India Fast Moving Consumer Goods Index.

London-based Diageo will acquire a 53.4 percent stake in United Spirits for 111.7 billion rupees ($2.04 billion), it said in a statement on Nov. 9. The investment will help the Indian company controlled by Vijay Mallya boost sales and spend on marketing, said Arun Kejriwal, director of advisory firm Kejriwal Research & Investment Services Pvt.

“It will now be managed by a company that is cash-rich,” Kejriwal said in a telephone interview. “Till today it has had the baggage of being overleveraged and not having the free cash required to run such a business.”

The Indian company had net debt of 42.9 billion rupees in the year ended March 31, according to data compiled by Bloomberg. United Spirits’s net debt including that of units was 83.8 billion rupees in the same period, the data shows.

The deal with the Johnnie Walker Scotch maker will help United Spirits compete in India’s premium whiskey market, analysts at Religare Capital Markets said in a research note today. India’s whiskey market may grow to $31 billion in 2016 from $21 billion in 2011, according to Euromonitor International estimates.

Margin Boost

The cash infusion will help United Spirits “improve its capital structure as well as margin profile in the medium to long term through premiumisation and operational efficiencies,” the analysts at Religare said.

“Earlier there were restrictions not only from within the group but from the regulator, from the bankers, because of the debts of other group companies,” Kejriwal said about United Spirits. “All those things will be a thing of the past.”

The deal comes as Chairman Mallya’s Kingfisher Airlines Ltd. is struggling with a cash shortage and a suspended operating license. Mallya has declined to comment on what the deal means for Kingfisher.

United Spirits’s net income for the three months ended September declined 73 percent to 392.7 million rupees as raw material costs surged, the company said in a separate statement to the stock exchange on Nov. 9. Net sales increased 24 percent to 22.2 billion rupees in the quarter.

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