Deal with Diageo may keep Mallya aloft

The liquor baron has indicated that the group is in talks to sell a stake in USL to Diageo
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First Published: Tue, Sep 25 2012. 11 39 AM IST
A file photo of the UB Group headquarters in Bangalore. For Diageo, a deal with USL will mean a much stronger and larger foothold in India where it has largely struggled to compete with the dominance of USL and Pernod Ricard. 
Photo: Aniruddha Chowdhury/Mint
A file photo of the UB Group headquarters in Bangalore. For Diageo, a deal with USL will mean a much stronger and larger foothold in India where it has largely struggled to compete with the dominance of USL and Pernod Ricard. Photo: Aniruddha Chowdhury/Mint
Updated: Wed, Sep 26 2012. 05 46 PM IST
Bangalore: Vijay Mallya’s UB Group may not be as big as the Tatas or the Ambanis in size and scale, but as far as public attention goes, the $4 billion-plus conglomerate attracts as much as any of those names. Its flagship businesses—liquor, beer and airlines— were once stock market darlings. Now, with Kingfisher Airlines Ltd mired in debt and awash in negative publicity, the most significant question for investors and lenders is: will Mallya use the group’s businesses to save the airline?
On Tuesday, the liquor baron offered a clue by announcing that United Spirits Ltd (USL) and the group’s holding company, United Breweries (Holdings) Ltd (UBHL), were in talks to sell a stake in USL to the world’s largest liquor company, Diageo Plc.
Media reports have speculated for months—amid repeated denials by UB—that Mallya will sell a stake in USL, the maker of McDowell’s whisky and Romanov vodka, to raise money for the airline business, which needs $300 million in cash within the next two months to survive, according to some estimates.
It wasn’t immediately clear whether the talks between the British company and USL include Mallya’s stake out of the 28% that he and UBHL together hold in USL.
“We are at the discussions stage. There is no certainty that a transaction will be done,” Mallya told reporters after USL’s annual general meeting on Tuesday in Bangalore.
Mallya declined to give more details about the talks.
USL needs to raise money to pay down its debt of more than Rs.8,500 crore, most of which was taken on to fund its 2007 acquisition of Scottish whiskey maker Whyte and Mackay.
The talks with Diageo come at a time when the conglomerate is at a crossroads. The group, which had sales of more than $4 billion in the year to March, had debt of over Rs.20,500 crore, which has increased since.
Kingfisher Airlines, weighed down by over Rs.8,000 crore of debt, has cut most of its flights and delayed paying salaries. One bit of comfort was the government recently allowing 49% investment by foreign airlines in Indian carriers, a move eagerly awaited by Mallya as a possible lifeline.
Some analysts, however, said Indian carriers may not be able to attract investment immediately because aviation business prospects in the country aren’t too bright currently, and Kingfisher especially doesn’t look like a prize catch.
A top executive at British Airways, one of those touted as a possible investor in the country’s carriers, has already said there are no immediate plans to invest in India.
In order to look like a good investment, more work needs to be done at the Mallya airline, said Varun Lohchab, an analyst at Religare Capital Markets Ltd. “Kingfisher will need large-scale restructuring before it may be able to find a FDI (foreign domestic investment) partner,” he said.
Pratip Chaudhuri, chairman of State Bank of India, one of Kingfisher’s main lenders, said on Monday that the UB Group can revive Kingfisher Airlines by selling stakes in its liquor and beer businesses as well as other assets.
“Debt is an overhang for this group—especially in their two largest businesses (USL and Kingfisher),” Lohchab said. “Apart from Kingfisher, they need to figure out how to deleverage the debt from the Whyte and Mackay acquisition. The beer business is very solid and their other businesses, though not spectacular, are pretty steady.”
The conglomerate’s other companies are facing tough challenges of their own. United Breweries Ltd (UBL), along with the rest of the beer industry, saw a sharp slowdown in sales last year, as high prices and strict regulations hurt demand. According to media reports, Mallya considered selling an additional stake in UBL, which makes Kingfisher beer, to Dutch brewer Heineken. Both Mallya and Heineken own 37.5% of UBL.
Other businesses available for raising cash are Mangalore Chemicals and Fertilizers Ltd and UB Engineering Ltd. The Times of India reported on Tuesday that two bidders are conducting due diligence as they look to buy Mallya’s 30.44% stake in Mangalore Chemicals. Analysts who used to follow Mangalore Chemicals and UB Engineering say these companies were not given much attention by the UB Group’s management, leading to a loss of investor interest.
“(Mangalore Chemicals) had good growth opportunities, but because of restrained capex (capital spending), they have not been able to grow as much as they could have,” said an analyst who used to track the stock and didn’t want to be named. “At some point, the UB management would have had to support them more, but they didn’t.”
Harminder Sahni, managing director at consultancy Wazir Advisors, said the beer and spirits businesses are by far the most lucrative of UB’s assets.
Sahni pointed to the example of Kishore Biyani having to sell, albeit reluctantly, a majority stake in flagship Pantaloon Retail (India) Ltd to pare debt, as the other assets available were simply not substantial.
Going by this parallel, USL, along with UBL, are Mallya’s best bets to raise cash.
This is not the first time USL and Diageo are talking. They discussed a possible stake sale in 2009, when the deal didn’t go through due to differences on valuation. Diageo has struggled to compete with the dominance of USL and Pernod Ricard, the maker of Chivas whisky, in India, hence their interest in a stake in Mallya’s company.
Analysts said a deal would cut distribution costs for both companies, and enable Diageo to get a better grip on the Indian market, besides boosting USL’s earnings and international expansion efforts.
Sunita Sachdev, an analyst at UBS, believes Diageo will eventually buy USL. “If the current stock price is any indication, the deal should be close to completion,” Sachdev said. The USL stock touched 52-week highs on reports, and finally news, of the discussions with Diageo.
“I think (the deal) will be a mix of both: USL selling an equity stake, and Mallya selling a bit of his own holding as well,” said Sharan Lillaney, an analyst at Angel Broking Ltd. “I don’t think Diageo will want anything less than a 20% stake in the company and Mallya will also not want to give up too much control, so it may largely be an equity sale by USL with Mallya selling the rest.”
mihir.d@livemint.com
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First Published: Tue, Sep 25 2012. 11 39 AM IST
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