He is widely known as the king of good times. UB Group Chairman Vijay Mallya, who inherited an empire of diverse businesses at age 27, is now trying hard to show that he can be a pragmatic king of bad times, too.
That explains Mallya’s move to hawk a part of his family silver at a time when the combined debt of his six listed companies has touched a whopping Rs 14,231 crore, as on December 2008. The debt is now more than the group's market cap, which has slumped 78.39 per cent to Rs 9,527.74 crore as on March 3, 2009, from a peak of Rs 44,091.37 crore on January 8 last year.
Some of the group's other numbers look no better. Though the group’s debt-equity ratio went down from 3.29 in March 2008 to 2.42 in December 2008 (it was 1.76 in March 2006), operating cash flow at a negative Rs 354.52 crore in March 2008 has been a major concern, because it has been negative for three of the last five years.
Yet, in those five years, UB went in for acquisitions worth around Rs 8,000 crore.
The bulk of this money went into the acquisition of Shaw Wallace in June 2005 for Rs 1,500 crore and Scotch whisky firm Whyte & Mackay (W&M) in May 2007 for Rs 4,800 crore. Although critics say the “king” ignored the danger signals, his backers say the acquisitions were made in the long-term interests of the group.
The plan now is to sell stakes in a couple of group companies, and other assets including real estate. One of the options being discussed is to divest 49 per cent in W&M. The purchase gave Mallya access to malt whisky distilleries in Scotland, as well as a range of spirit brands. The divestment will help repay loans taken for the acquisition by United Spirits, the flagship company, which has to repay $460 million (around Rs 2,300 crore) in equal instalments over five to seven years.
Mallya has also been in talks with Diageo, the world’s largest liquor maker, and a couple of other companies to sell over 15 per cent of United Spirits. The sale is expected to reduce debt and interest costs by Rs 1,200 crore to Rs 1,500 crore, provided the companies can deal with the anti-trust angle and what Mallya says are other “complicated” issues.
The promoters currently hold 36.59 per cent of the Rs 3,500 crore United Spirits, which is India’s leading alcohol beverage company.
Also on the block is space in UB City in Bangalore, a stake sale in the drug firm Aventis Pharma, and the infusion of around Rs 2,000 crore equity by bringing strategic/financial investors into Kingfisher Airlines. This last is subject to the government agreeing to allow foreign strategic partners in Indian airline companies.
Kingfisher has been a major drag on the group, as it has run up debt of Rs 5,356 crore in December 2008, while its operating cash flow was a negative Rs 542 crore. The loans were secured by a basket of securities, including shares of UB group companies and real estate.
Speaking to Business Standard from Spain, Mallya said there was no pressure on repayments as the loans were payable over a period of time, and the cash flows and profits of his companies were enough to service and repay the loans, even if no deals took place.
“Please remember, I have a flawless track record on repayments. I know what I am doing. For example, in 2000, I had assumed a lot of debt to make five acquisitions, and everyone was speculating that UB will sink. What happened? I did a deal with Scottish & Newcastle at a tender offer of Rs 575 against the then market price of Rs 160, and de-leveraged,” Mallya said.
While Mallya is upbeat about the different stake sales going through, the track record on reduction of the debt burden has not been uniformly good. For example, Deutsche Bank, through Euromax, had agreed to invest $100 million (around Rs 480 crore, at the then prevailing exchange rates) in the company.
But before the deal could be closed in December 2006, Edelweiss obtained a proposal for funding of $200 million (Rs 960 crore) from Lehman Brothers and D E Shaw through partially convertible instruments. Just then, the Reserve Bank issued a regulation stating that funding from international institutions had to be in the form of fully convertible instruments. None of the deals happened.
| GOOD TIMES, HARD TIMES | |||||
| Rs crore Co. Name | Total debt | Operating cash flow | |||
| 2006-07 | 2007-08 | Dec-08 | 2006-07 | 2007-08 | |
| Kingfisher Air | - | 934.38 | 5356.00* | - | -541.52 |
| Mangalore Chem. | 228.43 | 380.01 | 473.00 | 47.86 | -50.80 |
| UB Engg. | 48.73 | 5.35 | 4.00* | 1.76 | 16.08 |
| Uni.Brew.(Hold.) | 3220.58 | 5071.68 | 926.00 | -470.64 | -159.29 |
| United Breweries | 626.56 | 680.69 | 570.00 | 215.73 | 113.69 |
| United Spirits | 1480.17 | 6768.90 | 6902.00 | 530.14 | 267.32 |
| Total | 5604.47 | 13841.01 | 14231.00 | 324.85 | -354.52 |
| Debt/Equity ratio | 1.76 | 3.29 | 2.42 | ||
| * up to September 2008 United Spirits’ debt for December 2008 is on a consolidated basis; for others standalone basis United Breweries (Holding): Net worth and debt numbers for 2006-07 and 2007-08 is on consolidated basis | |||||
Later, the board of Deccan Airways had approved raising $400 million by March 2008 in the form of foreign currency convertible bonds or FCCBs. Merchant bankers like ICICI and SBI were appointed and draft documents were readied. But before the plan could be carried forward, the stock market crashed. The rule that valuation had to be based on the average of the previous six-months' share prices resulted in potential investors losing interest.
The pledging of shares has made matters worse. Mallya, along with his various promoter-classified companies, has pledged 91 per cent of their holding in United Spirits (the pledge is equal to 33.22 per cent of the company’s stock) as corporate guarantee to help Kingfisher raise money for its expansion plans. But Mallya doesn’t agree and says the underlying securities or assets against the loans are robust and that the shares that are pledged are only for a top-up.
