Posted by: John Elliott | November 14, 2008

Kingfisher dives towards United Spirits’ piggy bank – and DoCoMo helps Tata

A month ago we all knew that the world’s financial crisis was hitting India when the unthinkable was splashed across newspaper front pages – Kingfisher Airlines was talking to its bitter rival Jet Airways about co-operating in order to curb the drain on its funds.

This week Vijay Mallya, Kingfisher’s chairman, has done it again by talking to Diageo, the world’s largest liquor group, about selling maybe a 15-20% stake in his United Spirits company. His aim is to raise $400-500m (or more). He hopes to find a way of using that to help his ailing airline, which is said to be leaking $2m a day, even after the recent cuts in aviation fuel prices.

He has defaults, payment disputes, and over-due payments for charter aircraft, airport handling and oil supplies – and (along with other airlines) has to cope with an appeal from the prime minister’s office (PMO) not to lay off staff.

Now he is trying to raise more cash by persuading the government (Financial Times report) to allow foreign airlines to invest in Indian carriers – something Jet Airways has successfully persuaded the government not to do for years.

Vijay Mallya’s low spirits

United Spirits, a wholly-owned subsidiary of Mr Mallya’s UB group, is the world’s third largest liquor company and is regarded as a major UB cash cow. For a foreign rival to be allowed a slice of its equity illustrates graphically what is happening to companies like Kingfisher Airlines that over-reached themselves in the boom.

No-one is saying publicly what people at United Spirits think about a major rival cashing in on their business because of the airline’s misery. Rumours suggest they are far from happy and wish their ebullient – but currently depressed – boss would forget his airline and his cricket and Grand Prix racing teams. They would like him to forgo ego trips for a bit and focus on the core beer and liquor business that he has built up in the past 25 years from his father’s inheritance.

In any case, it is far from clear that Diageo will buy a stake. The story appears to have been planted on The Economic Times yesterday morning to inject some buoyancy into UB’s share price.

Diageo commented, rather stiffly I thought, that it was “reviewing a possible collaboration” with United Sprits, but – significantly – there was “no certainty at this stage that these discussions will result in a transaction”. That suggests that the story is very premature

Some reports say that valuation of a stake is the main stumbling block but there are other problems – not least how the two businesses would co-operate  – specifically, how Diageo would achieve its major aim of using United Spirits’ excellent distribution networks and supporting relationships for its leading Johnnie Walker whisky and Smirnoff vodka brands that compete with UB.

But why would anyone would want to buy around 15-20%? Such a stake would carry no clout under Indian company law, where 26% is the key figure to have some say in company decisions – as DoCoMo clearly realises (see below). Go for 26% Diageo, or don’t go at all!

 Tata’s getting worried too

Ratan Tata is also getting concerned about the impact of the crisis on his group, especially after splashing out in the past year or two with Tata Steel the buying Europe-based Corus steel company, and Tata Motors picking up the UK’s Land Rover and Jaguar brands. With both purchases, he was gambling on a buoyant world economy boosting demand for steel and for cars at the luxury end of the market.

Now the tide has turned. Two weeks ago Tata Motors had to prop up a Rs41.5bn (approx $1bn) rights issue designed to refinance a $3bn loan for its $2.4bn purchase after investors, including leading Indian and foreign institutions, shied away. It has also cut back production.

Mr Tata has  warned senior management “to be sensitive and conscious of the difficult financial circumstances existing today”. A spokesman said they had been “requested to be proactive to focus on cash flow and conserve expenditure wherever prudently possible”.

Media reports say – no doubt correctly – that Mr Tata has gone considerably further in a memo to senior staff and warned that failure to manage the crisis could lead to “irretrievable positions”. Acknowledging the problems faced in raising funds at home and abroad, he said companies should put any planned acquisitions on hold unless they were strategically critical.

That sobering news was quickly offset in pr terms with an announcement that DoCoMo, the Japanese telecom company, is paying $2.7bn got a 26% stake in Tata Teleservices, one of India’s least successful mobile operators. Though less than Tata would have got for the stake a year or two ago, that is a good price and a welcome injection of funds for the group. Presumably it had been planned for some time, unlike Mr Mallya’s reach for a Diageo lifeline.


Responses

  1. […] The air fares point led to more jokes yesterday. Mallya said there was a similarity between his drinks and airlines businesses –“they both make you fly”. Goel commented later that he only had an airline to run, whereas “Vijay can live on the liquor” if reduced airfares lost him income (Kingfisher Airlines has never made a profit). […]


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