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Spirit in the sky

19 Jul 2012 By Jeff Glekin

Vijay Mallya’s woes at Kingfisher Airlines are infecting the rest of his empire. The airline’s debt is backed by guarantees from his holding company. That means unless he saves Kingfisher, he risks losing another jewel in his crown. With Diageo and Heineken waiting in the wings, Breakingviews has taken at look at what India’s flamboyant “Liquor Baron” can do to survive.

Kingfisher is not yet dead, but it’s certainly on life support. The airline hasn’t turned a profit since it was founded in 2005 and has seen its domestic market share fall from second to last among the country’s six big carriers. Its fleet has been scaled back from 64 planes to 16 and it has stopped flying overseas.

As far back as September 2011, Canadian research firm Veritas reckoned that Kingfisher’s debt exceeded the value of its assets. Net debt stands at $1.4 billion, while unpaid wages and taxes add a further $477 million to what it owes, according to Kotak Institutional Equities. The airline’s lead lender, State Bank of India, will not consider any fresh loans until Kingfisher raises new equity.

Banks have been holding out for some kind equity injection, perhaps from a foreign airline. But at present that is still prohibited, and even if foreign direct investment were allowed, less-indebted airlines like Spice Jet or Indigo look more attractive.

So if Mallya wants to prop up the airline he’ll have to sell other assets. His crown jewel is United Breweries, which makes Kingfisher beer. Mallya’s combined holding in that business, including various investment vehicles, is around 30 percent. At current market prices, that stake would raise around $800 million. Heineken, which already owns 37.38 percent, is the obvious buyer. Though the Dutch brewer is cautious about increasing its exposure to India’s notoriously murky beer market, it may be tempted. UB controls around half the fast-growing Indian market, and at 1.5 litre per person per year beer consumption is far behind China at 45 litres and western Europe at over 60 litres.

But why sell a good business to save a failing airline? While Mallya has pledged shares in almost all his other businesses to secure loans, his UB stock is largely unencumbered. Kingfisher beer has become his hallmark and pride alone is likely to ensure that he’ll do everything he can to keep it.

That leaves United Spirits, which owns Whyte & Mackay and is the largest sprits-maker in the world by volume. But that business may already be out of Mallya’s control. Though his 30 percent stake is worth around $560 million, 94.42 percent of those shares have been pledged as collateral for loans according to Bombay Stock Exchange data. A collapse of his airline could trigger a crisis in his holding company United Beverages Holdings, which in turn could put the shares he’s pledged in United Spirits at risk. Diageo is a likely suitor, and with Mallya out of the picture the drinks group would have a free rein.

In the India of old, the politically powerful Mallya might have been able to twist some arms to get creditors, which are mostly state banks, to keep his airline aloft. In the current climate that kind of bailout looks impossible. Nevertheless, with the consortium of largely state banks dithering, a mixture of foreign investment, a haircut for creditors and an equity infusion from Mallya could in theory save Kingfisher. If the business was then able to cut costs and get some tax breaks on aviation fuel, as the government has hinted, there’s actually no reason why it should not be a long-term success. India’s aviation industry has grown at 16 percent every year in passenger traffic terms over the past decade and air travel penetration in India remains among the lowest in the world.

If the banks pull the plug, Mallya risks losing both the airline and his liquor business. But in order to find the cash for the rescue he may have to sell shares in his United Breweries. In order to survive, Mallya may have to choose which drink he prefers: whiskey on the rocks, or a frothy beer?


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