Buyers queue up for Whyte & Mackay assets; deal a win for United Spirits

United Spirits has invited prospective bids for Whyte & Mackay (W&M) afterDiageo offered to sell most of its whisky assets to address the competition concerns arising from its July acquisition of a controlling interest in India’s United Spirits.

According to a CNBC-TV 18, several private equity players have offered to buy majority of the business, valuing the assets at $1.3 billion.

United Spirits had bought W&M for $1.2 billion in 2007. Itis a leading supplier of blended whiskey to supermarkets and other top retailers in the UK.

Diageo, the world’s biggest spirits maker, said on Monday that it would assist Britain’s Office of Fair Trading with its evaluation of the United Spirits deal and that a further announcement would be made in due course. In July Diageo picked up a 25 percent stake in United Spirits, part of industrialist Vijay Mallya’s empire and owner of Whyte & Mackay, which sells branded Scotch whisky but has a bigger business supplying bulk whisky that other drink makers brand as their own.

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However, the British competition authority said on Monday that Diageo’s lower-end Bell’s whisky competes with Whyte & Mackay’s own-label and branded whisky and that the merger may lead to “a substantial lessening” of competition.

“These companies are two of the leading suppliers of blended bottled whisky in the UK, especially to supermarkets and other large retailers,” said OFT Chief Economist Chris Walters.

Diageo has offered to sell Whyte & Mackay’s Invergordon, Jura and Fettercairn grain distilleries, which account for the bulk of its blended Scotch. It would like to keep the smaller Dalmore and Tamnavulin malt distilleries.

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Because the Whyte & Mackay brand is not very strong, it is unlikely to fetch as high a premium as other spirits sales, said Bernstein analyst Trevor Stirling.

Likely buyers could be Beam Inc or Bacardi, since both sell blended Scotch but lack their own grain distilleries.

Diageo’s whisky portfolio includes single-malt whisky brands such as Lagavulin and Talisker and blended brands including Johnnie Walker, J&B and Buchanan’s.

Sources told CNBC-TV18 that Diageo will not sell W&M’s brands in parts as it is still a key player in the UK.

Diageo is reportedly in no hurry to seal the deal and will study all offers before finalizing a buyer.

What experts are saying:

Analysts believe that W&M’ sale is a win for United Spirits as it will not only reduce the latter’s debt burden but also improve its working capital and provide money to fund future growth plans.

[caption id=“attachment_758259” align=“alignleft” width=“434”]  Diageo[/caption]

“If Diageo sells the Whyte & Mackay (W&M) business, which was acquired by USL in May 2007, we see it as a positive driver - if we assume that W&M assets are disposed of at a value close to the purchase price of $595 million, USL would be nearly debt-free. While the impact on F15 earnings estimates would be small, reduced leverage and resultant lower finance costs would improve earnings visibility,” said Morgan Stanley in a report.

Kimeng Securities India too thinks the stake sale is a big catalyst for USL stock.

“The potential sale will cut UNSP’s debt by more than 50% and reduce its capital employed by 25-30%. Even after considering some cut in EBIDTA from sale of existing W&M brands, the deal will be a huge EPS accretive. We will review our FY14 and FY15 forecasts when the deal is consummated,” it said.

Edelweiss too maintains a ‘buy’ on United Spirits, as it sees the positive development sharply reducing debt and leading to significant interest cost savings (interest caused 50 percent operating profit erosion in Q2FY14). Also, this will improve working capital. The fund infusion will help bolster the capex plans, it added.

According to a report in the Business Standard, Diageo, because of its global practices, could add more in terms of efficient management of capital and operating performance driving improvement in the return ratios.