Diageo’s cricket sale looks well-timed for new CEO, says UBS Proactive uses images sourced from Shutterstock
Diageo PLC’s (LSE:DGE)Â sale of its Royal Challengers cricket franchise is at what analysts at UBS describe as a rich valuation, with the deal helping the FTSE 100 booze maker chip away at a debt pile that has become an increasing concern for investors.
UBS calculates the sale values the franchise at 54 times its underlying profits (EBITDA) – a striking multiple that reflects both the booming value of sports franchises globally and the timing of the sale, which followed RCB’s first-ever IPL title win last June.
Diageo currently owns around 55.9% of United Spirits Ltd (USL), which in turn fully owns Royal Challengers Sports (RCSPL).
The deal implies the full deconsolidation of the disposed entity and the associated non-controlling interests, UBS said, with the total consideration mentioned for the 100% USL stake of 166.6 billion Indian rupees, which represents $1.8 billion or £1.3 billion.
The bank estimates Diageo’s share of the proceeds at $991 million or just below £740 million, which will reduce its net debt relative to earnings by around 0.14 times by the end of 2027, bringing the ratio to approximately 2.6 times – within the group’s target range of 2.5 to 3.0 times.
The disposal is part of a broader portfolio review initiated before the arrival of new chief executive Sir Dave Lewis, with UBS suggesting further asset sales could collectively generate around $5 billion and reduce debt further still.
Since Lewis was appointed in November, the group has sold off an African beer business EABL and last month cut the interim dividend in order to provide more financial flexibility to restructure the company, amidst weaker US spirits demand and softness in Chinese spirits.
UBS maintained its ‘neutral’ rating on Diageo with a 12-month price target of 1,730p, against a current share price of 1,363p, cautioning that a meaningful recovery requires proof of returning growth in the crucial US spirits market.