Open offer at Rs1,440, share price at Rs1,834. Math skews.
A sharp 34.93% surge in the price of the United Spirits share on Monday may have made things quite complicated for Diageo, the world’s biggest spirits company.
The stock gained the most in 16 years, with 3.11 crore shares worth Rs5,232 crore traded — the max ever — after brokerages upgraded it, preferring to call the Diageo deal a ‘game-changer’.
The spike to Rs1,834.60 means the share is now valued 27.5% or Rs394.60 more than the deal price of Rs1,440, which is where there was to be a preferential allotment and then the mandatory open offer.
Experts said it has become difficult for United Spirits to complete the preferential allotment, leave alone Diageo gaining 53.4% of the enlarged share capital. SP Tulsian, an independent analyst, said for a preferential allotment to succeed, United Spirts has to get approval at Rs1,440 from mostly foreign and some domestic institutions.
“Diageo would be most worried,” he said.
United Spirits’ shareholding pattern as on September 30 shows foreign investors held 46.19% stake, while domestic institutions had 4.93%. The deal mandates that in circumstances where preferential allotment is not successful (including where it is not approved by the shareholders of United Spirits), UB Holdings will sell additional shares of United Spirts to Diageo at Rs1,440 to ensure that Diageo ends up with a minimum 25.1% stake. This would mean the other party won’t be happy.
Even if the preferential sails or UB Holdings sells demurs, the open offer for 26% is unlikely to go through if the share price remains at the current level. Why should shareholders sell for 27% less?
According to the terms of endearment, the completion of the acquisition and tender offer is expected to be in the first quarter of 2013. Dara Kalyaniwala, vice-president, investment banking, at Prabhudas Lilladher, feels the mandatory offer is as per the Sebi takeover code and Diageo need not worry if it is unable to get voting rights irrespective of achieving 51% shareholding.
“However. if the voting rights come only after 51%, then one needs to wait and see how things shape up,” he said.
Tulsian said Diageo may have to raise open offer price at a later date if the stock price remains elevated and if they intend to gain a majority stake.
The deal details between the three parties have highlighted that that lower shareholding should not be a problem and that Diageo would be happy to reflect the results of United Spirits in its consolidated accounts. But experts are sceptical of such an arrangement.
“Diageo, for sure, would not be content with just 25.1% stake and would want to get 51% as most of the foreign players are not happy with management control with minority stake,” said Tulsian.
The road ahead seems quite uncharted for both, the predator and prey. Did the Hic Hic Hurray come about too early?
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