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Diageo-USL deal puts to test Mallya’s credentials

The jury is still out on whether the deal, which reduces Mallya’s USL holding to 15%, is a fire sale or a strategic move
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First Published: Fri, Nov 09 2012. 04 28 PM IST
Vijay Mallya remains chairman and retains a 15% stake in a company whose value can only increase and that he also continues to own a 37.5% stake in and control United Breweries. Photo: Hindustan Times
Vijay Mallya remains chairman and retains a 15% stake in a company whose value can only increase and that he also continues to own a 37.5% stake in and control United Breweries. Photo: Hindustan Times
Updated: Sat, Nov 10 2012. 12 05 AM IST
Bangalore: Vijay Mallya has always been keen to prove that despite his larger-than-life image of a hard-partying, free-spending millionaire, he is a shrewd and capable businessman.
The deal with Diageo Plc, the world’s biggest spirits maker, should bolster those credentials. The promoters (read: Mallya and associates) retain around 15% stake in the liquor company even after selling around 19% to Diageo for £660 million (approximately Rs.5,700 crore). Diageo will also subscribe to fresh equity totalling around an 8% stake, and make an open offer for 25% of the public shareholding. The total consideration of the deal is around Rs.11,166 crore.
Still, it wasn’t immediately clear how much of the money United Spirits Ltd’s (USL’s) promoters get would go towards the revival of Kingfisher Airlines Ltd, although analysts said they believed that some part would.
“I was termed flamboyant, and yes, everybody thought that I’d fritter away what I had inherited. But I was determined to prove people wrong,” Mallya said in a 2008 interview with CNN.
The jury is still out on whether the deal with Diageo, which effectively reduces Mallya’s holding in the firm to 15%, is a fire sale or a great strategic move.
On one side there is the fact that Mallya remains chairman and retains a 15% stake in a company whose value can only increase and that he also continues to own a 37.5% stake in and control United Breweries Ltd, which returned a net profit of Rs.126 crore on a revenue of Rs.3,628 crore in 2011-12.
Then, on the other side is the fact that Mallya’s UB group is deep in debt—to the tune of Rs.20,000 crore at the end of March 2012. (To be fair, a lot of other groups, including Tata, Essar and Bharti, also carry a lot of debt).
In recent years United Spirits has lost some ground to Pernod Ricard’s Indian arm. Analysts say that while United Spirits still dominates the market, Pernod Ricard generates more profit on half the revenue of the Indian company.
And there is Kingfisher Airlines, the now grounded and debt-laden airline that Mallya started with much fanfare in 2005, and which faces an uncertain future, unless Mallya can infuse capital into it or convince the banks to yet again restructure its loans.
Still, if there’s anything that can be said for Mallya—while the jury evaluates all the exhibits in the case—it is this: the man knows how to make a good exit.
In 2008, in the same interview to CNN, he said that the most joyous moment in his life was when he made a profit of $66 million on the sale of Berger Paints in 1996. Why? “.. (because) I earned this money, I did not inherit it. Now if I buy a yacht, a plane or a car, nobody’s gonna question me about it,” he said.
The man
Born in 1955 to industrialist Vittal Mallya and Lalitha Mallya, Vijay Mallya was made chairman of a sprawling conglomerate at the age of 28 after his father died of a heart attack in 1983.
At the time, UB sold about 2.85 million cases of liquor per year, and its beer sales were lower than the likes of Golden Eagle and Mohan Meakins. The conglomerate’s other businesses included pharmaceuticals, agrochemicals, paints, petrochemicals and plastics, batteries, food and carbonated beverages and a pizza chain.
Over time, Mallya either shut or sold the pharmaceuticals, batteries and the food and beverages businesses.
He spent money diversifying. Apart from Berger Paints, he bought a large engineering firm (Best and Crompton) in 1988; a dying firm called Malabar Chemicals and Fertilizers in a cut-price deal in 1990; and media businesses such as The Asian Age and the publisher of Cine Blitz, a Bollywood magazine.
Malabar Chemicals, now known as Mangalore Chemicals and Fertilisers, and UB Engineering (as Best and Crompton is now known) have since become publicly listed firms and have reported sales of Rs.3,700 crore and Rs.553 crore, respectively, for the year ended March 2012.
Much of his efforts and money, though, went into the liquor and beer business, and his bets have proven to be wildly successful.
United Spirits is now the world’s largest liquor firm by volume and sold 122.75 million cases last year; while United Breweries, the maker of Kingfisher beer, is India’s biggest brewer, far ahead of rivals such as SABMiller.
Together, the two firms generated nearly Rs.12,000 crore in revenue for the year ended March 2012.
“In the alcoholic beverages market, Vijay has an unrivalled understanding of consumer taste and supply chain and distribution network related to manufacturing,” said an investment banker who has worked with Mallya on several deals and spoke on condition of anonymity.
Over the course of his career, the twice-married Mallya built deep political connections (he became a Rajya Sabha member in 2002) and drew plenty of envy and enmity. His battle with Manu Chhabria is legendary. Mallya was arrested in 1986 for allegedly violating foreign-exchange rules; the allegations were linked to a takeover battle between Mallya and a Dubai-based businessman Manu Chhabria for a liquor company called Shaw Wallace. Mallya was released within a day but Chhabria won control of Shaw Wallace. Mallya would have the last laugh though—in 2005, he bought Shaw Wallace for Rs.1,300 crore from the Chhabria family after his rival’s death in 2002.
“Vijay looks at partnerships and tie-ups from the perspective of whether they would bring incremental or transformational value to his business. He doesn’t have a concept of permanent friends or enemies,” the banker cited above said.
That deal marked the beginning of an expensive acquisition spree for USL, topped by the £595-million deal for Britain’s whiskey maker Whyte and Mackay in 2007.
The challenge
All the businesses, however, are now being threatened by Mallya’s entry into aviation in 2005. Kingfisher Airlines, launched on Mallya’s son Siddarth Mallya’s 18th birthday, was marketed as India’s only world-class, premium airline with hot food and personable, well-trained air hostesses chosen personally by Mallya. For a while, things seemed fine and Kingfisher quickly became the No.2 airline in India by market share.
But its extravagance and expansion, largely fuelled by money borrowed from banks such as State Bank of India, (SBI) were out of touch with the difficult market conditions.
In December 2007, Mallya announced a buy-out of the low-cost carrier Air Deccan. Why would Kingfisher, a luxury airline, want to buy a shabby, down-market airline? Because Air Deccan offered a way to fly global routes, and Mallya desperately wanted to do so; Air Deccan offered the five-year operational track record required for flying abroad.
Between 2009 and 2012, Kingfisher would accumulate losses of over Rs.6,600 crore and debt of over Rs.7,000 crore. In September 2011, Canadian research house Veritas Investment Research published a highly critical report saying United Breweries (Holdings) Ltd and Kingfisher Airlines were “teetering on the verge of bankruptcy”. Kingfisher shut its budget airline in 2011; in 2012, the firm reached a nadir. It did not have money to pay employees and creditors. Staff began to strike work regularly because of non-payment of salaries. Lenders including SBI wrote off their Kingfisher debt as a non-performing asset. In March, the income tax department froze Kingfisher accounts due to long overdue payments. Kingfisher grounded most of its flights which caused hundreds of cancellations and the firm lost its No.2 position.
In September, a lifeline seemingly appeared—the government allowed 49% investment by foreign airlines in Indian carriers. Kingfisher said it was in stake-sale talks with foreign airlines and domestic investors, but a deal proved elusive and the airline remained short of funds. Mallya himself lost his place in Forbes’ billionaire list because of the erosion of Kingfisher’s stock price.
In October, employees of the airline again struck work citing non-payment of salaries since March and the wife of a Kingfisher employee committed suicide citing financial pressure. The firm shut operations till late November and its licence was suspended by the government. Though employees returned to work in late October after Kingfisher promised to pay salaries in a phased manner, doubts about the airline’s future persist.
Amid all this, Mallya blamed the government’s tax policies (high tax on aviation turbine fuel) and the media for Kingfisher’s troubles. At the company’s annual general meeting (AGM) with shareholders in 2012, he even suggested journalists engaged in insider trading were profiting from the wild movements in the Kingfisher Airlines’ stock.
At the Kingfisher AGM in late September, though Mallya was tested with tough questions, some investors said he would turn the airline around eventually.
“He has come back in the past. He’s got political connections and there is no one better to bring Kingfisher back,” a shareholder had said then, requesting anonymity.
The deal with Diageo may have given Mallya more time to save Kingfisher, the only extant UB business he started. “We have put almost £150 million since April 2012 into the airline. But that has not meant that I have had to sell my family silver to fund the airline,” Mallya told Reuters in late October.
That’s exactly what he seems to have done now, though, if he turns around the airline, he may well shake off the perception that he had frittered away what he inherited.
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First Published: Fri, Nov 09 2012. 04 28 PM IST
More Topics: Mallya | Diageo | USL | UB | Kingfisher |
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