Diageo rises on reported talks to sell IPL team Royal Challengers Bengaluru

Diageo shares rose on reports it is considering selling its Royal Challengers Bengaluru Indian Premier League cricket team for a potential valuation of up to $2 billion, which could reduce net debt to EBITDA to 3.1x in fiscal 2026 and be approximately 1% accretive to earnings, according to Jefferies. The potential sale aligns with Diageo's strategy to exit non-core holdings and reach its leverage target of 2.5 to 3.0 times net debt to EBITDA by fiscal 2028. Jefferies also noted Diageo has set a leverage target of 2.5 to 3.0 times net debt to EBITDA by fiscal 2028 and has revised its outlook on Diageo, flagging changes in cost discipline and cash management under the company’s new chief financial officer.

Analysis

Diageo plc (LON:DGE) shares experienced an uptick following media reports suggesting the company is contemplating the sale of its Indian Premier League cricket team, Royal Challengers Bengaluru, potentially valued at up to $2 billion, which could yield as much as $1.1 billion for Diageo's 55.9% stake held via United Spirits. According to Jefferies, a full sale at this valuation could modestly reduce Diageo's net debt to EBITDA ratio from 3.2 times to 3.1 times in fiscal 2026 and be approximately 1% accretive to earnings due to lower finance costs. This potential divestiture aligns with Diageo's stated strategy of exiting non-core holdings and its broader approach to asset sales, targeting both smaller and more substantial assets to achieve its leverage target of 2.5 to 3.0 times net debt to EBITDA by fiscal 2028, a goal Jefferies believes could be met by fiscal 2027. The franchise, acquired with United Spirits, is prominent, but operates in a market with restrictions on alcohol advertising and potential curbs on indirect promotion through sports. The associated Royal Challenge brand accounts for 12.4% of Diageo's sales in India, significantly less than its McDowell's brand (33.1%). Despite the positive implications of the potential sale, Jefferies has a cautious outlook on Diageo, citing changes in cost discipline and cash management under the new CFO, and has lowered its fiscal 2026 estimates for Diageo’s organic sales growth to 1.8% (consensus 3.6%) and EBIT growth to 2.3% (consensus 4.8%), with a projected EPS of $1.643 (consensus $1.707), noting that current valuation reflects several known challenges.

Key Decisions for Investors

• Consider the potential asset sale as a positive step towards Diageo's deleveraging targets and a modest earnings enhancer, aligning with its strategy to streamline its portfolio by divesting non-core assets.
• Evaluate the impact of this potential sale against the backdrop of Jefferies' more subdued near-term growth outlook for Diageo, particularly the below-consensus estimates for sales and EBIT growth, which suggest underlying operational challenges persist.
• Monitor Diageo's progress on broader cost discipline and cash management initiatives under new financial leadership, as well as any further non-core asset disposals, as these will be critical for achieving its leverage targets and improving investor sentiment beyond isolated transactions.