Diageo Targets A Stake In India's United Spirits – ValueWalk Premium

Diageo Targets A Stake In India's United Spirits

The worlds largest spirits company, Diageo Plc (NYSE:DEO) (LON:DGE), is in talks with India's United Spirits, in a bid to acquire a stake in the company that commands a 40% market share in locally.

Diageo Targets A Stake In India's United Spirits

According to a report published on Deal Book, Diageo Plc (NYSE:DEO) (LON:DGE) is rather pessimistic about the deal eventually taking place, following a stalemate that overshadowed a similar deal between the two companies, back in the year 2008. The report also indicates that the London, U.K-based Diageo did not reveal how much stake it was intending to acquire in United Spirits.

However, contrary to the 2008 stalemate, there seems to be a high chance of the deal happening this time around, besides Diageo's pessimistic character towards it. It is noted that a major shareholder, Indian billionaire, Vijay Mallya, who owns 28% stake in United Spirits, is likely to push the deal through as he is in the lookout for capital to build upon his airline, Kingfisher Airlines.

Diageo Plc (NYSE:DEO) (LON:DGE), which  has operations in North America, Europe, Africa, Latin America, the Caribbean, and the Asia Pacific, is one of several Western beverage companies expanding operations in the emerging markets. The company offers a range of brands, including Johnnie Walker Scotch whisky, Smirnoff vodka, Captain Morgan rum and rum based products, Baileys Irish Cream liqueur, Jose Cuervo tequila, Tanqueray gin, and Guinness stout, among others.

We recently wrote an article featuring Italian brewer Davide Campari-Milano, on its acquisition of the Jamaican leading brewer , Lascelles deMercado & Co, which was geared at increasing the companies sales. This indicates how competitive the industry is becoming, hence the need to extend operations to the  emerging markets.

Diageo Plc (NYSE:DEO), last month reported its June 30th 2012 end of the year results, that beat analyst expectations, as the emerging markets showed enormous strength, as net sales were up 15%, with operating profits settling at 23%.

Diageo Plc (NYSE:DEO) (LON:DGE)'s Chief Executive, Paul S Walsh, was quoted in the following statement with regard to business growth in Emerging markets:

“Diageo is a strong business, getting stronger, and the results we released this morning show that very clearly. We have increased our presence in the faster growing markets of the world, through both acquisitions and strong organic growth. We have enhanced our leading brand positions globally, through effective marketing and industry leading innovation, and we have strengthened our routes to market. 6% organic top line growth, 9% operating profit growth and 60 basis points of margin expansion is a strong performance, and demonstrates our commitment to delivering efficient growth”.

This is one of the major reasons the company is looking to acquire more stakes in leading brewers within the emerging markets. While its is so costly to set a brewing plant, Diageo is simply using the cheapest and easiest way out, also capitalizing on locally established brands, like India's United Spirit.

At the time of this writing, Diageo Plc (NYSE:DEO) (LON:DGE) was trading at $113.71 per share, up $1.84, or 1.64%, from yesterday's close. At the London Stock Exchange, Diageo Plc (NYSE:DEO) (LON:DGE) closed 1.91% up from yesterday's closing price, following the announcement of the intended deal.


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