Mallya may dilute 15% stake in merged airline

The move aims to raise Rs 16,000 cr for expansion.

Liquor baron Vijay Mallya could end up diluting 15-20 per cent of his 76 per cent holding in the merged airline as a result of Deccan Aviation's proposal to raise Rs 1,600 crore and expand authorised capital by Rs 350 crore, said airline experts.

Mallya is trying to raise Rs 1,600 crore for its airlines business through Deccan Aviation, the listed company into which he plans to merge Kingfisher Airlines. Deccan has called for an EGM on March 18. Deccan also plans to expand its authorised capital from Rs 150 crore to Rs 500 crore by adding 25 crore shares of Rs 10 each and one crore preference shares of Rs 100 each.

''This is meant for the overall expansion and international foray of Deccan and Kingfisher Airlines,'' said Deccan Aviation Chairman GR Gopinath. UB Group executives were not available for comments.

''The merged entity will be a big airline and require a lot of money. The target of Rs 1,600 crore looks reasonable given their plans to fly abroad. To start with 4-5 wide-body planes, you would need Rs 750 crore,'' said a senior industry expert. The funding would also help the two airlines sustain the cash burn.

Investment bankers feel the UB Group could opt for a QIP issue to mutual funds, hedge funds, or a private equity player as anchor investor.

''QIP is a good tool. It is fast and you just need 2-3 investors. They will evaluate various options, and play it by the ear,'' said an investment banker.

Will investors buy into Kingfisher?
Indian carriers have together lost $700 million (Rs 2,800 crore) in 2007-08, estimated the Centre for Asia-Pacific Aviation. Airlines have lost close to $1.2 billion in the last two financial years. Kingfisher and Deccan have Rs 2,190 crore in accumulated losses.

Private equity (PE) investors have shied away from investing in Indian carriers, except in budget carrier SpiceJet. PE investors such as Capital International and ICICI Ventures, which had initially invested in Deccan, have cashed out.

Efforts by Deccan, Kingfisher and GoAir to rope in private equity investors have not met with much success. But experts feel Mallya stands a good chance this time.

''The worst is over. With consolidation, yields are firming up. With oil at $102, no new players are likely to come in,'' said a senior executive with a PE player who requested anonymity.

''Investors will be looking at value buys. Oil prices will not remain so high. If I am looking at a 30 per cent market share, then I would look at Kingfisher closely,'' added the investor.

''Investors are always willing to back the sector. It's a specialised sector. These are investors who made money, understand the sector, and are betting more on the macro-economic factors,'' said the executive with a private equity firm.

These are specialist airline investors such as Indigo Partners and private equity firms Capital International, Texas Pacific Group, Temasek and Istithmar, which has invested twice in budget carrier Spicejet.

The Tata Group has also invested in SpiceJet while Anil Dhirubhai Ambani Group was in talks with Deccan before Mallya jumped in the fray and picked up a 26 per cent stake in the budget carrier.

Experts feel Mallya may get different type of investors, large hedge funds, local mutual funds, West Asian institutions or some local corporate group.