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UB’s Mallya plans for the future

UB’s Mallya plans for the future
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First Published: Thu, Feb 21 2008. 11 40 PM IST

Brand equityP: Chairman of UB Group Vijay Mallya.
Brand equityP: Chairman of UB Group Vijay Mallya.
Updated: Thu, Feb 21 2008. 11 40 PM IST
Vijay Mallya touches down at New Delhi’s Indira Gandhi International Airport in his Airbus Corporate Jet on the afternoon of 19 January. Stepping off the plane after flying in from his home in Sausalito, California, the 52-year-old Indian billionaire dives into a Mercedes-Benz to drive to a meeting with a government minister. The next stop is the Metropolitan hotel to interview flight attendants for his Kingfisher Airlines Ltd.
Brand equityP: Chairman of UB Group Vijay Mallya.
Back in his house on New Delhi’s Sardar Patel Road by 8pm, he nurses a tumbler of whisky distilled by Glasgow, Scotland-based Whyte and Mackay Ltd, his latest acquisition, as Accenture Ltd consultants advise him on Kingfisher’s merger with India’s Deccan Aviation Ltd.
After replacing jeans and jacket with a dark suit, white shirt and pink tie, Mallya heads to a dinner hosted by his liquor company, United Spirits Ltd. He’s home by midnight, then off to Mumbai at 2am to bid $112 million (Rs449.1 crore) for — and eventually win — a new cricket team in Bangalore.
Good-times king
With yachts, homes around the world and a collection of more than 260 cars — from Alfa Romeos and Jaguars to Ferraris and a 1913 Rolls-Royce Silver Ghost — many of which Mallya drives when he finds time, he’s a living advertisement for Indians’ upwardly mobile ambitions.
In 1983, at age 27, Mallya inherited Bangalore-based UB Group from his father. He took charge of a liquor company that produced a scant 2.85 million cases a year; a brewer that trailed an Indian rival; a pizza chain; a battery maker; and a paint company, among others.
Since then, the goateed Mallya, with his silver hair and diamond ear studs, has embraced his Kingfisher beer’s “The King of Good Times” motto as his own. And he’s working overtime to persuade Indians they should live the high life too.
UB Group consists of seven publicly traded companies in India, and Mallya is building many of them with an eye to providing middle-class Indians with an image makeover.
United Spirits, with 66 million cases a year, is now the world’s third largest liquor company. Another UB Group company, United Breweries Ltd, is India’s biggest beer maker. Kingfisher Airlines, which started with four leased planes in 2005, is poised to become the country’s largest domestic carrier based on aircraft and destinations when it merges with Deccan.
Shares of United Breweries Holdings Ltd, Mallya’s publicly traded umbrella company, and his United Spirits have both more than doubled in the past 12 months. United Breweries Holdings traded at Rs880.20 on 21 February; United Spirits was at Rs1,701.90.
“In emerging markets, people are looking for aspirations and lifestyle,” says Taina Erajuuri at Glitnir Asset Management in Helsinki, who manages €180 million ($260 million) in Indian equities including United Spirits. “People like to see and look at these things and say, ‘I would like to be there.’ Mallya is the symbol for the brands.”
Fending off rivals
As Indians clamour for cachet, Mallya is fending off rivals eager to cash in on the nation’s consumer lust. Anheuser-Busch Cos., maker of Budweiser beer; Carlsberg A/S, the largest Nordic brewer; and Diageo Plc., which produces Johnnie Walker Scotch, Smirnoff vodka and Guinness beers, are vying for a share of the booming Indian market. Beer sales soared 30% to 137 million cases in the year ended 31 March 2007. Liquor sales, based on volume, rose at an 8.6% compounded annual rate from 2001 to 2006.
If the pace of India’s growth continues at a compounded annual rate of 7.3%, India would become the world’s fifth largest consumer market in 2012 from 12th now according to New York-based consulting firm McKinsey and Co.
Corporate governance
With the spotlight on India, Mallya will need to make sure his companies meet investor expectations for corporate disclosure and governance. In 2002, Mallya’s software company, UBICS Inc., bought a Boeing 727 jet and then leased it to United Breweries Holdings. The Canonsburg, Pennsylvania-based company said in an October 2002 press release that the deal would allow it to earn a better return on its $7.2 million cash reserve.
A month later, UBICS’ independent auditor, BDO Seidman Llp., resigned over how the transaction might be interpreted under the Sarbanes-Oxley Act, which aims to protect investors from the possibility of fraudulent corporate accounting.
UBICS president Sunil Patil defends the lease arrangement. “There were years when UBICS was in the black only because of the returns on the plane,” he says. “It was a win-win transaction for shareholders, for UBICS and for the UB Group. But yes, analysts perceived it as slightly negative.” UBICS sold the plane to United Breweries Holdings in August 2007.
Mallya’s United Breweries, United Breweries Holdings and United Spirits own many of his homes. That includes his beachfront villa in Goa, where he holds an annual New Year’s Eve bash with multiple bars and a yacht anchored off the coast. The companies also own homes he uses in Bangalore, New Delhi and Scotland, Mallya says. Kingfisher Airlines runs the Airbus jet Mallya flies, according to India’s Directorate General of Civil Aviation.
Blurred lines between private and corporate ownership may be troubling to shareholders, Glitnir’s Erajuuri says.
Brand ambassador
UB Group chief financial officer Ravi Nedungadi says information about ownership of Mallya’s houses isn’t reported in company filings. Indian law doesn’t require such disclosure, says Tarun Chaturvedi, who studies accounting issues and is an associate professor of finance at Management Development Institute in Gurgaon, near New Delhi.
“Rather than spend millions getting film stars, I am quite happy to be brand ambassador myself,” Mallya says.
Another thing Dr Mallya, as he prefers to be called, may have to be clearer about is the origin of that title. Mallya’s biography for India’s upper house of Parliament, where he’s been a member since 2002, says he holds an honorary doctorate in business administration from Southern California University, Irvine. A university of that name doesn’t exist. Instead, Mallya got his honorary degree in 1997 from Santa Ana-based Southern California University for Professional Studies, a distance-learning and online educational institute, Carol Stanton, chief operating officer at the school, said in a 2 February email. The school changed its name to California Southern University last year.
A United Breweries Holdings 3 December 2007 prospectus for a sale of shares to select investors lists the degree as from Southern California University, Santa Ana. Nandini Verma, executive vice-president for corporate affairs at UB Group, didn’t respond to emails and faxes asking about discrepancies in the reporting of Mallya’s degree.
History
UB Group traces its roots not to Indians, but to British soldiers’ love for beer. In 1915, a Scotsman named Thomas Leishman bought five breweries in southern India to form United Breweries. It sold its first bottled brew, called Exports Beer, in 1944.
When India gained independence in 1947, Vittal Mallya, Vijay’s father, bought United Breweries the same year. Vijay was born eight years later. The young Mallya had a rarefied upbringing, recalls Kiran Mazumdar-Shaw, managing director of Biocon Ltd, India’s biggest biotechnology company. Mazumdar-Shaw’s father worked for United Breweries and the two children grew up on the same street in Bangalore. “Being the only child of a very wealthy father meant he enjoyed a lot of privileges that we didn’t enjoy as kids,” Mazumdar-Shaw says. “He had a battery-operated toy Ferrari car as a young child, which we all used to love driving.”
“I wanted to be a doctor because my grandfather was a doctor,” Mallya says. “My dad said it had to be our business, which was predominantly liquor.” Mallya graduated with a bachelor’s degree in commerce from Kolkata-based St. Xavier’s College in 1976. This time, his father shipped him off to the US to work with American Hoechst Corp., a unit of Hoechst AG that’s now part of Sanofi-Aventis SA.
“I had a $14,000 salary,” he says. “I had to stay in a studio apartment, cook my TV dinners, drive a beat-up old second-hand Chevy.”
Along with learning how to live like a typical new graduate, Mallya says the US taught him the power of marketing. Citibank, part of Citigroup Inc., introduced 24-hour automated teller machines while he was in New York and ran ads that proclaimed, “The Citi Never Sleeps.” When a machine malfunctioned, a rival seized the opportunity with an ad that said, “We Caught the Citi Napping.” “This left a profound impact on me,” Mallya says. “I just loved marketing.”
During the years Mallya was abroad, his father was expanding UB Group. In the late 1970s, the government of then prime minister Morarji Desai tried to push prohibition in India. The threat prompted liquor company owners to sell distilleries and breweries on the cheap. Vittal snapped them up, realizing that prohibition wouldn’t succeed because India’s states depended on revenue from alcohol sales. He was right. Desai’s attempt to ban liquor didn’t succeed.
In 1983, shareholders approved Mallya as chairman after his father’s death from a heart attack. Mazumdar-Shaw says Mallya, who was always flamboyant, was eager to prove his talents and his instincts about consumers.
Mallya faced a setback in 1986. On 5 January, he was arrested at Bangalore airport after arriving from Kolkata for violating India’s foreign-exchange rules, the Indian Express newspaper reported on 7 January 1986.
He was detained on suspicion that he’d acquired 38.7% of Kolkata-based liquor maker Shaw Wallace and Co. with a Dubai-based businessman, Manohar Rajaram Chhabria, through companies in London and Hong Kong, according to the newspaper. He was released on the afternoon of 6 January, the newspaper reported. At the time, the country had strict rules for transactions involving foreign currency because it was scarce and tightly controlled. All transactions had to be approved by the Reserve Bank of India. Violations of the Foreign Exchange Regulation Act, 1973, were treated as criminal offences.
Mallya denied the charges at a press conference on 7 January, according to an 8 January Indian Express article. Mallya says the case went to court and he was acquitted of the charges. Sudhir Nath, director at the Enforcement Directorate of India’s ministry of finance, didn’t respond to requests for information on how the case was resolved. The government of prime minister P.V. Narasimha Rao opened India’s economy in 1991. The law was changed in 1999.
Self-made
Mallya says the experience disillusioned him about India. He married an Air India flight attendant named Samira in 1986. The couple had a son, Sidhartha, the next year, according to a 22 April 2002 interview in The Times of India. They moved to London in 1988, where Mallya bought Berger Paints, owner of Berger, Jenson and Nicholson, where he’d worked a decade earlier.
“I just wanted to do something on my own,” he says. “I was sick of people telling me that I had inherited a business.” He sold Berger in 1996 for a $66 million profit.
Mallya’s marriage ended in divorce in the early 1990s. In 1993, he married Rekha, a neighbour from Bangalore, and moved to Sausalito.
By 1998, Mallya and Nedungadi had begun plotting their UB Group makeover in earnest. Undeterred by the nationwide ban on alcohol advertising and cultural taboos about hard liquor, they set out to change Indians’ and investors’ perceptions.
“There was a wide-held belief that there is this nebulous nexus of crime and mafiadom in the alcohol industry,” says Nedungadi, who adds there were no institutional shareholders in UB Group companies at the time. “People had visions of liquor trucks speeding away in the night and whatever little flash there was in Mallya’s personality tended to reinforce that imagery.”
Mallya started his liquor expansion with Indian companies. In June 2005, he took over Kolkata-based Shaw Wallace, the country’s second biggest spirits maker.
That September, he completed the acquisition of Herbertsons Ltd, which owned Romanov vodka and India’s biggest selling whisky brand, Bagpiper. In July 2006, Mallya pounced on French winemaker Bouvet Ladubay SAS; in May 2007, he acquired Whyte and Mackay.
Tech express
Mallya turned his attention back to airlines in May 2007. Kingfisher bought 26% of low-cost carrier Deccan. In October, it raised that to 46%. Two months later, Mallya announced the merger.
Indian law requires an airline to complete five years of domestic operations before it can fly overseas. Deccan will fulfil that requirement in August, and Kingfisher plans to use Deccan’s rights to begin international flights. Kingfisher has dubbed the first route, Bangalore to San Francisco, the Tech Express.
“We will connect the two Silicon Valleys of the world,” Kingfisher executive vice-president Hitesh Patel says.
On 25 January, Mallya got new partners in the beer business. Heineken NV and Carlsberg agreed to buy Scottish and Newcastle Plc., the UK’s biggest brewer, for £7.8 billion ($15.2 billion). Scottish and Newcastle owns 37.5% of Mallya’s United Breweries. The stake may be inherited by Heineken.
“There is great potential for combining the strengths of the two companies,” Mallya said in a statement the same day.
Mallya says his advantage in liquor is that he knows how to navigate the system. Alcohol distribution and sales are regulated by India’s states, which impose different taxes. Some, like Andhra Pradesh, also control prices.
“Every state in India is like a country,” United Breweries president Kalyan Ganguly says. Both United Breweries and United Spirits are also pushing into wine.
“It is the perfect time to get into wine,” United Spirits president Vijay Rekhi says. “There is a greater interest in wine by the Indian consumer because of affluence and health consciousness.”
United Spirits expects the wine market in India excluding imports and very cheap varieties to soar to 2.5 million cases during the next five years from 800,000 on 31 March 2007. It’s aiming for a 30% share by fiscal 2012.
Different perspective
Just as his father did, Mallya is grooming his son to succeed him. Sidhartha, 20, who grew up in London, has three choices to get work experience: He can join an airline, a beer maker or a liquor company—even if they’re rivals, Mallya says.
“He needs to get a different perspective working in an independent environment where his father does not have any influence,” Mallya says.
“It is tough, and that’s the way I did it.”
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First Published: Thu, Feb 21 2008. 11 40 PM IST