Broker snap: Diageo's USL deal comes at the right time, says Nomura

12th Nov 2012 09:52

Nomura has raised its target price for beverages giant Diageo from 2,000p to 2,100p and retained its 'buy' recommendation for the stock, following last week's deal to buy a stake in Indian spirits group United Spirits Limited (USL).Diageo said on Friday that it is to acquire a 27.4% stake in USL for around £660m and announced a tender offer to buy an additional 26% stake (53.4% interest in total), which now means that the company generates 45% of revenues from emerging markets, "well on the way to the target of 50% by 2015", Nomura said. The broker said: "Announcement of this deal ahead of Diwali next week means that the celebrations can really begin, with the company gaining control whilst retaining a significant local minority interest."Nomura said that the deal represents a "very significant medium-term upside potential in India" for Diageo. USL's volumes last year matched Diageo's (121m cases of spirits), but the cost to buy the majority stake (£1.3bn) is a fraction of Diageo's enterprise value at over £50bn."We see very significant opportunity to add value through premiumising local spirit and leveraging the distribution platform for international spirits, especially Scotch whisky."Meanwhile, Nomura said that a "likely" reduction in import tariffs on scotch could add over $400m to the profile pool for scotch in India (versus the current estimate of $40m) "with the company in a good position to capture the lion's share".Shares were up 0.41% at 1,810p in mid-morning trade on Monday.BC