United Spirits' second share sale this year nets $350 million

India's United Spirits has raised $350 million from a qualified institutional placement (QIP) that was upsized by 40% due to strong investor demand. This was the second time in just over three months that the company tapped the equity market, but rather than putting people off, it actually seemed to increase the attractiveness of the deal.

Sources said expectations that United Spirits, which is part of the United Breweries Group, would have to raise more funds to reduce its large debt burden have been acting as an overhang on the stock, and with that now out of the way, the stock should be able to resume its positive performance.

Indeed, the share price gained 7% yesterday after the placement was completed. The level of interest was somewhat unexpected given that the QIP was offered at a discount of 0.9%, but analysts stress that while United Spirits has been suffering from an increasing debt burden since it bought Scottish whiskey distiller Whyte & Mackay in 2007, its core business performance has remained solid with strong sales volumes -- leaving the company in a good position to boost its bottom line once the debt costs stop eating into its profits. United Spirits is the third largest producer of spirits in the world with more than 140 brands in its portfolio, including whiskeys, brandies and white spirits.

The liquor maker launched its QIP on Wednesday evening on the back of a 2.3% gain in India's benchmark Sensex index and was helped during the bookbuilding by a strong US market. By the time the books closed at 10am Thursday morning Hong Kong time, investors had ordered enough stock to allow the full upsize option to be exercised, increasing the deal from $250 million to $350 million, and still leaving the deal multiple times covered.

And United Spirits wasn't the only Indian company to take advantage of the rising Indian market on Wednesday. HCL Infosystems brought a QIP that was also upsized, although not in full. Still, having been launched at a base size of $70 million, with an option to increase up to $108 million, the deal ended up at $102.4 million.

As is now common practice for Indian QIPs, both deals were launched at a fixed price. A key reason for this is that issuers tend not to hang around waiting for a more attractive pricing opportunity, but to grab the issuing window as soon as it appears. Together with the fact that they are bound by a minimum price -- the floor price -- this means the issuers typically offer the lowest possible price to attract investors.

United Spirits offered its shares at a price of Rs913.7 apiece, which was equal to the floor price and translated into a 0.9% discount versus Wednesday's closing price of Rs921.75. After the upsize, it sold close to 17.7 million shares, which accounted for 16.4% of the existing share capital and about 17 trading days based on the average turnover in the past three months. Citi, CLSA, Morgan Stanley and UBS acted as joint bookrunners.

According to sources, the deal was covered in three hours by Indian and European accounts - the deal opened at 9pm Hong Kong time on Wednesday so not many others were around. However, this created good momentum when Asian investors got a chance to look at the deal the next morning and allowed the bookrunners to close the books an hour earlier than planned. The demand was said to have included a lot of top quality investors and several very sizeable orders from global long-only names. In all, about 40 investors were allocated stock. 

The strong aftermarket performance was likely driven in part by the fact that many of these investors had their orders significantly scaled back, forcing them to buy in the secondary market if they wanted to top up their allocations. Historically, United Spirits has been held by large institutional investors for the slightly longer term, meaning the stock isn't that liquid. The chance to buy shares in a meaningful size would therefore have been quite tempting for many investors, irrespective of the tight discount.

That said, the company did sell 10.28 million treasury shares at the end of June at a price of Rs880 apiece -- a 4.05% discount versus the market price at the time. However, that deal, which was led by Citi and CLSA, was placed with less to 15 investors.

HCL Infosystems, a small-cap company involved in the distribution of third-party computer and mobile hardware, the manufacturing of its own branded computers, systems integration and more recently the management of schools, offered its shares at a fixed price of Rs154.69. This too was equal to the floor price, although partly thanks to a 2.8% share price gain on the day of the deal, this resulted in a more appealing (relative to United Spirits) 3.6% discount versus the latest close of Rs160.45.  

Based on the final deal size, HCL sold 30.6 million shares, which accounted for 17.9% of the existing share capital. CLSA and JM Financial were the joint bookrunners. 

Sources said the deal was placed with more than 20 investors, including Indian, Asian, European as well as US names. While the demand wasn't strong enough to exercise the upsize option in full, the share price did trade slightly higher yesterday in the wake of the transaction and ended 1.1% up on the day.

The deal came on the back of a strong rally, which has seen the share price gain about 140% from a 2009 low in early March. Yesterday's close was only slightly below the 12-month high of Rs168.65 that the stock hit in mid-September.