The King has lost his throne

In the mid-1970s, when Vijay Mallya’s father Vittal Mallya was widely known as the takeover king, he was also remembered for his extremely thrifty habits.

On one occasion, a manager who had accompanied him to Bombay (now Mumbai), saw him spending several minutes examining a bill after checking out of the five-star Taj Mahal Hotel and punching some numbers into his calculator watch.

This happened again when both of them checked out of another star hotel in Panaji, Goa.

The manager was really puzzled. On the way back to the airport, the manager mustered up enough courage to ask his boss why he had checked each and every detail of the bills. “Sir, do you think a five-star hotel will cheat us?” asked the manager. To which Mallya Senior replied that the money he was spending belonged to the shareholders and, as he was the custodian of their company, he had to be doubly careful while using their resources.

shareholder concerns

In October this year, after a rather tepid AGM of United Spirits, contrary to what the media expected it to be, Vijay Mallya told this correspondent that if he seals a deal with Diageo, it will be because he wanted to unlock the value of his company for the benefit of its shareholders.

Two different eras. But the same concern for shareholders. Or is it?

It does seem to be true as far returns for the shareholders of United Spirits are concerned, but a quick look at some of the other group companies reveals a lot of red ink. A wag put it well when he said that red being the colour of Kingfisher Airlines, shareholders shouldn’t have expected anything other than red in the balance sheet too. Incidentally, the airline has never made profits since its inception in 2005.

But perhaps the best perspective on the Diageo-USL deal came from an analyst, who said that it was as good as Mallya selling off his house and staying back as a tenant. (On Friday, Diageo announced it has agreed to buy a 53.4 per cent stake in United Spirits for a whopping Rs 11,166.5 crore, including an open offer to shareholders, in what is considered the biggest M&A deal this year.)

Kingfisher liability

While Mallya can claim that the entire deal was a “win-win” for both companies, it does not seem so. Diageo and USL were locked in negotiations for over four years but the talks kept breaking down because of valuation and stake issues. When the deal did finally go through, Diageo got what it wanted: a huge market which it considers has the potential to become its largest in a few years and at a valuation and a stake it is more than comfortable with. Nor does it have to field uncomfortable questions from either its shareholders or its board.

Mallya has benefited too but in a rather different manner, and for two reasons: One, Mallya was left with no choice because of mounting debt on the books of United Spirits — slightly over Rs 8,000 crore. Add to that the debt in Kingfisher and other companies, it bloats to Rs 20,000 crore.

There are, of course, other companies in the country with the same, or higher, level of debt piled up in their books. But the difference is that the UB Group carries a liability in the form of Kingfisher, which is not operational any more but has more than 2,000 employees on its rolls, debt of over Rs 8,000 crore and losses of over Rs 9,000 crore.

Also, of the 27.8 per cent that UB Holdings owns in United Spirits, 27.2 per cent of the shares have been pledged and the group does not have the cash to redeem them. A cash-strapped company can hardly hope to invest in a market where regular infusion of capital is the only way to retain market leadership.

And if one of its chief competitors is snapping at its heels, the scenario only turns worse. French company Pernod Ricard, which owns the iconic Absolut Vodka, has made rapid strides in the Indian market. It was the one which stayed back to fight after Diageo quit the scene in India in 2002, after it first made an entry. It makes more money in a market dominated by United Spirits but sells just about 25 million cases — roughly one-fifth what the Indian company sells in the domestic market. The Indian liquor market, dominated by Indian made foreign liquor (IFML) brands, is worth 260 million cases (a case is a dozen bottles of 750 ml each). USL alone sold 120.54 million cases in 2011.

Positive for USL

Edelweiss, in a recent report, said the deal will be positive for USL as it will strengthen its presence in the premium portfolio, where it has been losing out to Pernod Ricard. “Foreign management could improve operational efficiency and boost margins, since current promoters are focusing more on other stressed group companies. USL will also enjoy benefits of scale by setting up bigger manufacturing plants. Further, it could gain access to some international (emerging) markets,” the report said.

Also, the “sell out” to Diageo, however much Mallya hates that term, means there will no longer be a nationally-recognised Indian-owned liquor company. He, however, put up a rather brave front at the tele-conference after the deal was announced. But the fact is: once Diageo gets to 53.4 per cent stake through an open offer, USL will become its subsidiary.

Will Mallya then continue to remain Chairman of USL? What will finally happen to USL is anybody’s guess, but as of now, the British company has Mallya on its side and, therefore, does not have much to fear in its second innings. In its initial foray, it fell into all the pits dug up for the purpose by some of its strong Indian competitors. As if this was not enough, it even sold its Indian whisky business, Gilbey’s Green Label in 2002. Ironically, it was bought by United Spirits and now, after the latest deal, the brand returns to the Diageo fold.

Not just that, Diageo will get access to a USL distillery in almost every State in the country, it will own Whyte & Mackay which, when it was bought in 2007, had close to 115 million litres of bulk Scotch whisky, French wine company Bouvet Ladubay, and the domestic wine business, Four Seasons. Apart from that it will own hundreds of distribution points in a market in which USL has an over 40 per cent hold.

So, is it really a “win-win” deal for both Mallya and USL? Looked at in any way, if a company allows another to own half of it and reduces itself to a minority, its promoters do not have much to look forward to, do they?

giriprakash.k@thehindu.co.in

COMMENT NOW