Business Today

Down, but not out

Vijay Mallya's high-flying days maybe over, but his airworthiness can still take him a fair distance.
twitter-logo Venkatesha Babu        Print Edition: May 24, 2015
Down, but not out

It was a bitter-sweet April for India's most flamboyant businessman Vijay Mallya. The massive showdown at the April 25 United Spirits (USL) board meeting, where the 59-year-old Mallya was asked to step down as the Chairman of the company now controlled by global liquor giant Diageo, could well be the beginning of a bitterly fought battle that threatens what once was a mighty business empire. April 13, meanwhile, was a day for him to both lament and exult. On one hand, the buyers of his 11-seater private jet - which had been seized and auctioned by the Mumbai International Airport to recover part of Kingfisher Airlines' dues - began dismantling it to sell it off as scrap. On the other, he achieved a minor victory by staving off a hostile takeover bid by Deepak Fertilisers and Petrochemicals on Mangalore Chemicals and Fertilizers (MCFL), a UB Group company.

A bid for a company owned by Mallya - himself a feared corporate raider - would have been unimaginable a few years ago. But today, the 'King of Good Times' stands considerably weakened by the debilitating impact of the now defunct Kingfisher Airlines, which has left him with a debt pile of Rs 8,657 crore and a host of lenders lined up with suits against him. Ever since, Mallya has been battling on several fronts to save his crumbling holdings in group companies. But the triumph over Deepak Fertilisers only proves Mallya may be down, but definitely not out.

Mallya's response to the April 25 face-off with Diageo is a case in point as he immediately went on an offensive, taking to Twitter to insist he had an agreement with Diageo to remain chairman and that only a full shareholders' meeting could oust him. At the same time, he has refused to explain his position or actions. "I am not going to submit myself to a trial by media," began one of the tweets. "I intend to continue as USL Chairman," said part of another. Messages and emails from Business Today to his office went unanswered.

Mallya's share in USL has already fallen to 4.09 per cent, while that of global liquor giant Diageo has risen to 54.78 per cent over the last few years. But on the stock exchanges, Mallya is still listed as the Indian promoter and Diageo as the foreign promoter and Mallya remains chairman of the company so far, based on the agreement with Diageo when the deal was done.

At the meeting, USL CEO and Managing Director Anand Kripalu submitted a PricewaterhouseCoopers (PwC) report saying receivables, advances and deposits worth Rs 1,337.50 crore had been diverted from USL to other United Breweries (UB) Group companies between 2010 and 2013. Following the tabling of the report, the other directors of USL called upon Mallya to resign as chairman and quit the board.

Mallya, with his 4.09 per cent holding, might seem to be a weak hand, but he still has considerable resources at his disposal. He is an influential Member of Parliament and carries goodwill with several leading politicians cutting across political boundaries. He has also threatened to move court. "Diageo needed Mallya to understand the lay of the land. India can be a minefield, especially in such a sensitive industry. Many may be underestimating Mallya," says a former USL senior executive. Apart from this, though he may not be a billionaire now, he still has enough wealth to fight a lengthy battle to stake claim to what he believes is rightfully his. "The charges by USL are pretty serious. Mallya will defend his stand vigorously through legal and other channels. There is no question of exiting the company," says a source close to Mallya.

Fraught with Irony

USL is the biggest player in the India Made Foreign Liquor (IMFL) segment of the country's liquor market, with about 40 per cent market share. It owns 31 manufacturing units and has another 57 facilities in partnership with others. It had revenues of Rs 10,615 crore in 2013/14 and its share price, oblivious to the tribulations of other Mallya companies such as Kingfisher Airlines, has more than tripled in the past three years, against an overall 56 per cent rise in the Bombay Stock Exchange Sensex.

"The situation is fraught with irony in that for years, before it acquired a foothold in USL, Diageo had been wooing Mallya in its bid to capture the Indian market," says a former UB executive who does not want to be named. Mallya finally succumbed in November 2012, after debts mounting from the collapse of Kingfisher Airlines forced his hand. Thereafter Diageo, using open offers and overcoming several legal hurdles, kept increasing its stake till it became majority shareholder in July 2014. All the while, Mallya even referred to Diageo's Indian-origin CEO, Ivan Menezes, as his "friend". Conversely, as late as November last year, Diageo backed Mallya's re-election as chairman of USL.

'We had advised USL minority shareholders to vote against Mallya when he sought re-election as chairman last year,' says Shriram Subramaniam, MD, InGovern.
But changes at USL had begun ever since Diageo obtained a controlling stake in the company in 2013, and acquired greater momentum from July. Among the first was the sale of Whyte & Mackay, the Glasgow-based liquor company USL had bought in 2007, to Philippines-based Emperador Inc, for an overall loss of Rs 4,652 crore. While the sale had been on the cards, the enormous write-off - considering USL always insisted Whyte & Mackay had been doing well - was not. Another was the steady attrition of senior USL executives who had been close to Mallya - Managing Director Ashok Capoor, UB Group Chief Financial Officer Ravi Nedungadi, Harish Bhat, Bharath Raghavan, Prakash Mirpuri, A. Raghunathan and R.N. Pillai. Some of them have quit the UB Group, while others remain associated with other Mallya companies.

In May last year Diageo brought in Kripalu as CEO, making him MD as well after Capoor quit. The latest Mallya loyalist to depart was Chief Financial Officer P.A. Murali in April this year. Four of the six independent directors on the board of USL - Renu Sud Karnad, G.N. Bajpai, Arunkumar Ramanlal Gandhi and Vikram Singh Mehta - have also resigned over the past year citing multiple reasons.

For a third, USL has withdrawn its sponsorship of the Indian Premier League cricket team, Royal Challen-gers Bangalore, even though Royal Challenge is one of its leading whisky brands. (The team's main sponsor now is Chinese telecom equipment maker Huawei.) Then again, in January 2014, Diageo's posted one of its senior executives, Steven Grubb, at the USL headquarters in Bangalore as Global Compliance Transformation Director. In August, Grubb announced a new "code of business conduct" for USL - replacing an eight-year-old one Mallya already had in place - intended to ensure the company met Diageo's global standards of compliance, ethics and internal audit. Whether such standards are practicable in India can, however, be questioned.

The liquor industry in India is a minefield of ethical challenges for many reasons, even if one has the best of intentions. It is a state subject and operating in the Indian market could often mean that a company has to meet state-specific laws and regulations. There is also social and religious taboo associated with the product. Often the buyer is a single state monopoly and navigating the regulatory and political environment could mean making compromises, which is industry shorthand for corruption. Demands from local officials and politicians could, therefore, become unbearable and there have been cases where companies had to even stop operations in some states. However, most of them have publicly given other reasons for doing so. Mallya, an old hand in stitching up personal equations with both the state machinery and local players, could use these relationships to throw a spanner in the works of Diageo's India plans.

Why Now?

Finally, Diageo hired PwC to conduct - alongside its own risk and compliance team, and legal team - a forensic audit of USL, which resulted in the report submitted to the board on April 25. Then the other directors called upon Mallya to resign as chairman and quit the board. Mallya's response - though he has refused to address specifics - is that every allegation made relates to a period before Diageo acquired a controlling interest in USL and should accordingly have been brought up while Diageo was conducting its due diligence before taking over. So, why now?

"Yes, due diligence had been undertaken? (but) any due diligence exercise, even when properly carried out, has its limitations, as not every issue arising on account of historical transactions can be identified," said a Diageo spokesperson in response to a questionnaire from Business Today. "We were aware in disclosures given before our investment in USL of receivables owed from various third parties to USL. We were given express representations that all of these receivables were recoverable in full."

What about Mallya's claim that Diageo had a contractual obligation to support his continuance as chairman? "The obligation is subject to certain conditions as well as the absence of certain defaults by UB or Mallya," the spokesperson added. "USL has provided its inquiry report and all related material to Diageo, which will now consider its position under its agreements with Mallya and United Breweries."

Future Uncertain

Analysts are divided over the ethics of the clash and its likely consequences. Shriram Subramaniam, MD of proxy advisory firm InGovern Research Services, puts Mallya in the dock. "We had advised minority shareholders of USL to vote against Mallya when he sought re-election as chairman last year," he says. "Our apprehensions about irregularities in the accounts of the company have proved accurate. The Securities and Exchange Board of India (SEBI) or other competent authorities should take a closer look at the whole affair."

Lalit Kumar, partner at leading law firm J. Sagar Associates, is less harsh. "If the alleged transactions had been scrutinised earlier and no objections raised, and if the board was fully aware of the details, then Mallya's argument holds some weight," he says. He agrees, however, that SEBI has the right to take suo motu notice to protect minority shareholders. "If the allegations are proved, even other board members at the time may be liable," he adds.

Is Mallya right in asserting that only a full meeting of shareholders can remove him? "A majority of board members can remove the chairman," says the former UB executive. "But only shareholders can remove a director. Since no one knows the exact details of the agreement between Mallya and Diageo, it is hard to comment. But usually such a tussle is precursor to a lengthy legal battle or a negotiated settlement." Which will it be? Diageo can easily summon an extraordinary general meeting of shareholders to remove Mallya from the board altogether, but Mallya has made it clear he will then go to court.

High flying: UB City in Bangalore
What about buying out Mallya's remaining stake? Some observers are not even sure the 4.09 per cent stake remains with Mallya or has been pledged to meet Kingfisher Airlines' losses. "The most likely outcome would be a negotiated settlement or a buyout of Mallya's remaining stake by Diageo," says Subramaniam. "But minority shareholders could still move against this as the value of their holding would be impacted."

Indeed, Mallya, who took over USL following his father's death in 1983, is bound to have plenty of supporters among the company's rank and file. He is known to have been a generous employer during the good times. The outcome of a protracted battle with him remains in doubt, even for the likes of Diageo.

The Diageo spokesperson refused to comment on whether Mallya had already made any marketplace moves against USL. Nor would she be drawn out on how, if at all, USL proposed to get back the money diverted to other UB Group companies. But she was clear that market speculation about USL concentrating only on its 14 'power brands' in a post-Mallya scenario, was misplaced. "We have said USL will focus on power brands, but there is no question of exiting what may be called low-end brands," she added. "The question of selling those brands does not arise."

If indeed Mallya is elbowed of USL, the wheel, in a sense, will come full circle for the company. It was formed in 2006 with the amalgamation of four companies, all making alcoholic beverages - McDowell and Co, Herbertsons, Shaw Wallace Distillers, and Triumph Distillers & Vinters. But at its core was the first company, McDowell, started by a Scot of the same name in the 19th century, which Mallya's father bought in 1951, at a time when many British companies were exiting India in the wake of Indepen-dence. Diageo is a London-head-quartered British company too. USL will thus once again come to belong to the British.

Rest of the Empire

Mallya may have suffered reverses but his liquor holdings ensure he is still worth several hundred million dollars. The April 13 announcement by Deepak Fertilisers that it would divest some of its holding and would ultimately liquidate its entire share in MCFL was the culmination of a two-year-long battle in which Mallya, who holds a 22 per cent stake in MCFL, teamed up with friend Saroj Poddar to ward off the hostile bidder. When Deepak Fertilisers launched an open offer to increase its holding, Poddar's Zuari Fertilisers and Chemicals, which also owned a 16.43 per cent share in MCFL, followed suit. Though Deepak Fertilisers managed to increased its stake to 31.25 per cent, it finally bowed to the joint opposition of Mallya and Poddar.

Ostensibly, the retention of MCFL is one of the few successes Mallya has had in recent years, clouded, above all, by the huge debts run up due to the Kingfisher Airlines debacle. But some number crunching by BT shows that going only by his assets which have not been pledged, he is worth several hundred million dollars. This does not take into account his private wealth, which at one time comprised 25 real estate properties across the world including a 12,000-acre stretch in South Africa and private islands in the Maldives, three luxury yachts, four private planes and around 250 vintage cars. How much of this he still retains is unclear, barring the fact that one jet has been dismantled and another stands grounded.

Mallya's wealth is primarily due to his direct holding of 27.44 per cent in UB and 4.09 per cent in USL. Both of them have been thriving. Every investor in UB would have earned a return of 74 per cent in the past three years, while USL would have more than tripled his investment.

The Vijay Mallya story is one of a swashbuckling, charismatic 28-year old, who inherited a group of companies dominating the Indian liquor market and took it to still greater heights over the next three decades. He moved into numerous other industries as well, acting almost on whim, with mixed results - pizzas, pharma, batteries, paints, fast moving consumer goods, engineering, telecom, media, mining, petrochemicals, infrastructure, hotels and finally his nemesis, aviation. His forays include Pizza King, Berger Paints, Best & Crompton, Vijay TV, Kissan Products, UB MEC Batteries, Carbonated Beverages, Hindustan Polymers, Western India Erectors, Masonelian India, Shilton Hotels, Sotiba Garments and UB Pharma. He also remains the non-executive chairman of pharma company Sanofi though he has no stake left, after having sold it earlier.

He had been a corporate raider, too, acquiring companies such as Berger Paints and Best & Cromptom in hostile takeovers. "There was a time when Mallya could do no wrong," says a former UB Group CFO, who worked with him in the late '80s and early '90s. "I still remember the deal he signed to acquire Berger Paints. Only after the press conference in London announcing the deal, did he ask his finance team to go out and raise the money for it. He had inked the deal without first tying up the finances. That's the kind of chutzpah he has."

Yet, whatever the fate of the other ventures, the perennially profitable liquor business always protected him. Moreover, by early 2004, he had cleaned up his act and was focused on very few sectors, till he took the fatal decision to launch Kingfisher Airlines in 2005, as a 18th year coming out gift for his son Siddartha.

Crash Landing

There were several intimations of the coming crisis but Mallya chose to ignore them. "Even when he was advised not to persist in a business like aviation where cheques fly faster than planes, he didn't listen," says a former senior executive with the UB Group who does not want to be identified. "But that is Vijay Mallya for you. That is how he operates, both for bad and good."

The challenges Mallya confronts are no doubt enormous. Kingfisher Airlines still owes a whopping Rs 8,657 crore to a 17-member bank consortium. Lenders have already started invoking the personal guarantee that was offered by Mallya, and have already taken possession of the 17,000 sq ft Kingfisher House in Mumbai's Andheri. They may also eventually take possession of several other assets, including Kingfisher Villa located at Candolim in Goa and the two defunct helicopters.

However, even if the consortium manages to take possession of all his personal assets, both in India and abroad, it may not be enough to pay off the debt that Kingfisher Airlines has accumulated over the years. Even brand Kingfisher, which was vested with State Bank of India, is worth a mere Rs 6 crore now, down from around Rs 4,000 crore between 2009 and 2012. This might lead to further troubles for Mallya as the lenders are considering to seek legal recourse to recover their dues.

In MCFL, it is Zuari Fertilisers' intervention which has kept the company in the UB Group fold and Mallya will have to play second fiddle to Poddar. In USL, it is Diageo which will ultimately decide on his chairmanship. Most importantly, even in UB, global leader Heineken's stake of 38.85 per cent exceeds that of Mallya's. Heineken entered UB following its acquisition of UK spirits firm, Scottish & Newcastle, which had a 37.5 per cent stake in UB, in 2008. Since then it has increased its stake by buying part of Mallya's pledged shares which his creditors sold.

Mallya has been slowly trying to improve his position. He had sold 50 per cent of his South Africa-based United National Breweries to Diageo for $36 million in early 2013; in April this year, he sold the remaining 50 per cent as well for $22 million. "The money could be used to shore up his holding in UB where he feels threatened," says the former UB executive.

Mallya's son and presumed heir, Siddharth Mallya, 28, who describes himself on his Twitter account as a "future legend and terrible speller", has shown lukewarm interest in his inheritance so far. He is based in Los Angeles, and is believed to be pursuing an acting course and tweeting mostly about the performance of Royal Challengers Bangalore in the current season of the Indian Premier League. "At his age Vijay Mallya was working full time in UB. Sid just doesn't seem to be interested," says an ex-aide. "He disappears for long periods!" Mallya has two daughters as well, but they are not involved in family business.

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