United Spirits can fall 65% if Diageo deal fails: Macquarie

After jumping up on the stock exchanges for the last week, shares of Vijay Mallya’s liqour company United Spirits were down in a bullish market today as brokerage Macquarie pointed out that the stock price ignores the risk of the deal falling through.

The stock was down 1.6 percent at Rs 1,257, while the BSE Sensex was up 1.4 percent at 18840.80.

The investment bank has kept a negative view on the stock with a price target of Rs 440 which implies a 65% drop from Thursday’s close of Rs 1,276.85.

[caption id=“attachment_472236” align=“alignleft” width=“380”]  Mallya is living in “cloud cuckoo land” AFP[/caption]

Even brokerage Edelweiss noted that the deal going through is the only key trigger for the stock. “We believe the deal, if inked, will be positive for USL as it will strengthen the company’s presence in the premium portfolio, where it has been losing out to key competitor Pernod Ricard. Funds infused via the deal will also help deleverage the balance sheet,” Edelweiss said in a report.

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Earlier this week, Diageo said that it was in talks with UB Group company United Spirits and its parent United Breweries Holdings to acquire a stake in the Indian spirits group.

The two companies have been in talks for over two years and need to overcome several hurdles, especially the issue of valuation which Diageo cited as the principal reason for the previous attempt failing. The other two reasons include size of the stake that Diageo will be able to acquire and whether it will be able to gain management control over the group. Earlier B_loomberg_ had reported that if the deal is finalized Diageo may get the right to appoint a majority of United Spirits’ board members, including the chairman.

Diageo wants control but Mallya has long been unwilling to let go, a stance that could derail the current talks even further. Firstpost had said yesterday that if Mallya is talking to Diageo to sell a stake in United Spirits, it is largely because he has pledged too much of his liquor business and his personal assets to keep Kingfisher afloat. He threw away his good business to rescue the bad.( Read more here )

On Thursday, rating company ICRA, downgraded the company’s rating for delay in debt servicing as there is no certainty that these discussions will lead to a transaction. This essentially means that loans to United Spirits have been downgraded to junk status.This downgrade, could however, force a transaction, failing which lenders would turn wary of funding even the liquor business.

Diageo’s entry can help it lower the debt burden, which is crucial as interest ate away half its operating profit.

Shares of other group companies too are trading lower today. While Kingfisher Airlines was trading at Rs 16.12, down 4.95 percent, United Breweries Holdings fell 6.6 percent to Rs 136.40 after rising 33 percent in the previous four sessions.