Whyte & Mackay sale could free United Spirits of debt: Morgan Stanley

Nov 27 2013, 08:08 IST
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SummaryWhile there is a broad consensus view on the long-term growth of USL, rising input costs, poor industry construct in India

While there is a broad consensus view on the long-term growth of United Spirits (USL), rising input costs, poor industry construct in India and low visibility on earnings keep most investors on the sidelines. In the context of the recent shift in management control, we see an opportunity for increase in profit pool for the industry in India, better operational performance and a marked improvement in working capital management to underpin continuing stock performance.

In addition, 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.

The Office of Fair Trade (OFT) is considering an offer by Diageo to sell most of its W&M business to address competition concerns regarding bottled blended Scotch whisky, arising from its acquisition of USL.

Both Diageo and W&M are major suppliers of bottled blended whisky to retailers, with W&M also being an important supplier of own-label blended whisky. The OFT’s investigation found there is substantial competition in the retail sector between Bell’s whisky, a Diageo label, and W&M’s own-label and branded blended whisky. The OFT found the merger may lead to a substantial lessening of competition in the supply of blended whisky to retailers, leading to higher prices for retailers, and ultimately consumers.

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