Burning tyre at Formula 1 races in Kuala Lumpur, Shanghai and Bahrain, cheering filly Set Alight at the Mumbai Derby, galloping to South Africa to watch Royal Challengers battle at the Indian Premier League (IPL). April was busier than usual for Vijay Mallya. But VT-VJM, his corporate jet that boasts of a Picasso as part of its beige and cream interiors, made it a breeze for the flamboyant booze baron.
May has proved equally busy. As the IPL winds down, the corporate jet touched down in the south of France, the playground of the rich and famous. There, the Cannes film festival that brings together the glitterati and global media provided the perfect setting for Mallya’s big party.
Previously, he had held parties at Cannes on his 312-foot yacht Indian Empress or at plush seven star hotels. But there’s no need for that anymore. Just a 10-minute boat ride away, on the picturesque island of Sainte Marguerite, is a $60-million villa that he owns. The black-tie event was hosted there on May 16.
Yet, in the middle of all this, Mallya has been leading a double life. He has spent the past few months negotiating for the survival of his empire. His debts have zoomed. So have his losses. The economic slowdown has made his daring bets of the boom period look like risky gambles. He must stem the losses, or even the healthier parts of his business will fall prey.
Since April, Forbes India has tried to get in touch with Mallya as well as the senior management of his group companies in Mumbai and Bangalore for this story. But the officials have been consistently travelling or too busy to respond.
Mallya has accumulated about Rs. 14,000 crore worth of debt spread across his liquor and airline businesses through costly acquisitions of global liquor companies like Whyte and Mackay and a bleeding balance sheet courtesy Kingfisher Airlines. In an email to Forbes India just before we went to press, Mallya said the number is “grossly overstated”. Refusing to answer a specific question on the debt he said, “The UB Group comprises several independent public and private companies…. Each independent company has its debt and its cash-flows and there is no case for aggregation.” However, a look at the published results for six listed companies in the group reveals a total debt of Rs. 14,231 crore for Kingfisher Airlines, United Spirits (USL), UB Holding, Mangalore Chemicals, UB Engineering and United Breweries (UB).Supersonic Loss-making
At the core of this battle is Kingfisher Airlines, losing cash at an alarming rate in the middle of the decade’s biggest fall in passenger turnout. The debt on the airline’s books is over Rs. 5,000 crore, much of it guaranteed by United Breweries Holding Ltd., the group’s holding entity. As the airline’s monthly losses have crossed Rs. 200 crore, Mallya has no option but to push for more corporate guarantees from his other companies. Already, UB Holding is seeking shareholder approval for doubling the limit of its corporate guarantees to Rs. 12,000 crore. Most of these will be to support loans taken for Kingfisher Airlines.
It’s a pressure cooker situation inside the airline, say insiders. Four months ago, aircraft leasing company GE Commercial Aviation (GECAS) wrested back four jets it had leased to Kingfisher after the airline defaulted on lease payments. Since then, dozens of other lenders and suppliers have begun turning the screws. Among them are oil companies who have threatened to stop supplying fuel, unless Mallya settles their dues of nearly Rs. 1,000 crore.
The face of the smiling host at the French Riviera hardly showed it, but panic is spreading within the UB group. At Kingfisher, Mallya’s attempt to stem the cash burn has yielded few results and the cash-burn continues this quarter. Five of the A330 aircraft that Mallya so fondly fitted with bars, bartenders and chefs are either parked at airports or flying with many empty seats. The lease rental for each of the long-haul planes is about $1 million a month (Rs. 5 crore), and they are being used to operate the airline’s two international flights to London and Colombo.
If you took a peek into Mallya’s second life in the past two-three months, you would see him stalking the dusty corridors of the ministries of finance and aviation in Delhi, schmoozing with junior bureaucrats that he would have otherwise never condescended to acknowledge. The purpose? To lobby for soft loans and softer terms for airline repayments plus permission for foreign airlines to invest in Indian carriers. But the policy is in a flux and his bitter rival, Naresh Goyal of Jet Airways, has managed to counter-lobby and delay a decision till now.
Between the Cup and the Lip
Mallya’s golden goose, of course, is his alcohol business. Both beer and white spirits have been growing at 20 percent, the highest for any liquor company globally. USL has 52 percent market share. It is this edge that Mallya will try to cash on. It is quite another matter that the company has debts of Rs. 6,225 crore weakening its bargaining position. He has explored deals with Asahi and Bacardi, before starting protracted talks with the world’s largest liquor company, Diageo, to sell a stake in USL. He hasn’t yet accepted the offered price. It’s a game of brinkmanship.
But his counterparties know he is neck-deep in debt and must sell quickly. Earlier this month, the Diageo Asia-Pacific President John Pollaers said, “We have been in discussion, but we haven’t yet been able to find a structure that is acceptable to both partners. We shouldn’t assume that this will lead to a transaction overall.” USL stock price fell 8 percent on the day Mallya issued a statement saying talks were still on and were slow because of anti-trust tangles.
A lesser businessman might have caved in under the burden but not Mallya. The celebrations seem to go on forever. He is waiting for that magic moment when all the deals will materialise and blow away the debt. “I’ve never seen Vijay even remotely ruffled. He is super confident that he’ll be able to get things to work out,” says a leading banker who does business with Mallya but prefers to stay anonymous. Between Life and Debt
Those who know him closely say he will pull through, just like he has done on many occasions in the past. Playing a high-stakes game has always been Mallya’s style. “Vijay has always been up to his eyeballs in debt,” says a senior investment banker, who does not wish to be quoted because he’s worried that he would be barred from the grand parties on Mallya’s yacht.
Not all is lost yet. This month, one confidence building measure he managed to swing is a marketing agreement with Dutch beer maker Heineken to sell the latter’s brands through the UB network. The deal is expected to fetch UB Rs. 300 crore.
You’ve got to grant Mallya one thing: Not many tycoons can hope to mix champagne with debt covenants as adeptly as he does — and still retain their spunk.
But the alarming levels of debt have spooked bankers. So while Mallya is pushing for a package of about Rs. 2,000 crore to pull his airline out from the brink, negotiations have been hard and the bankers are insisting on tough contracts, like securitised payments that mortgage the future earnings of the airline. “With more money being borrowed to fund higher losses, there is a danger of getting into a debt-trap,” says one banker working on the deal. Also, there is no sign of any meaningful turnaround in the business, which the bankers were promised early this year.
As of now, it is a battle of attrition between the bankers and the UB group financial team led by Mallya and his lieutenant Ravi Nedungadi, who has seen him through several tight corners. “He is a man with many lives,” says Ravi Jain, promoter of wine company Vallee de Vin and one who has worked at close quarters with Mallya at Shaw Wallace. He echoes popular belief when he says, “He just needs to hang in there for some more time. Things will change when the market recovers.”
Time is Running Out
Mallya urgently wants to conclude at least two deals. First, he has set a target to raise $800 million for a 14.9 percent stake in USL. Diageo is likely to be the partner for this, though he has not stopped talking to Asahi or Bacardi. He is also banking on a 49 percent stake sale in Scotch whisky maker Whyte and Mackay with a distribution management deal. If this works out, he’s hoping to make USL debt-free in one fell swoop. Mallya is also said to be negotiating with private equity firms for offloading a large stake in USL and Whyte and Mackay.
Mallya confirmed in his email response that there was strong interest from PE players. So till these two deals are consummated, Mallya has to hang in there. But before that, he’s got to take some hard decisions in his airline business. Over the past six months, the situation has become precarious: Overall capacity in the market has fallen with most airlines pruning operations.
“In Kingfisher’s case, the problem was that Mallya had his foot on the accelerator till much too late,” says Nigel Harwood, now CEO of Interglobe Aviation but who had been the CEO of Kingfisher Airlines during 2005-06. Even as global airlines started to hurt from overcapacity, Mallya relentlessly pursued new purchases that have led to the current mess.
One immediate way out is to stop international operations and focus on domestic flights. (The airline operates daily to over-served routes to London from Mumbai and Bangalore.) But this could be hard for Mallya who was personally involved in charting the flight plan for the global rollout to connect Europe, Singapore, Dubai and San Francisco.
A possible cut-back also means Mallya will have to play second fiddle to the man he loves to hate: Naresh Goyal, the London-based owner of Jet Airways. Mallya had vowed that he would best Jet and snatch the title of the king of the skies from Jet. So instead of pushing back, he forged ahead with plans for a new Bangalore-Dubai flight from June 25.
Mallya remains hopeful that the new government would allow Indian airlines to sell a stake to foreign investors, but even if that happens, at current valuations, he is unlikely to get more than Rs. 500 crore for 49 percent of Kingfisher Airlines.
Till his deals fructify at the valuations he seeks, Mallya is hoping that a team of public sector banks share his burden. He has managed to get audiences with the chairmen of at least three PSBs, including State Bank of India, to ask for a new line of credit for his floundering airline. In his meetings in North Block with the joint secretary of banking, Mallya has relentlessly pitched for loan restructuring and easier terms from lenders. His argument: Airline companies were hit first by rising oil prices and now by depressed demand, and need help. SBI has already provided Rs. 500 crore of an approved loan of Rs. 900 crore. Other PSU banks are expected to chip in with about Rs. 1,000 crore more.
It’s only a matter of time before the king of good times gets a lifeline thrown to him to fly high all over again. (Additional reporting by Rohin Dharmakumar)
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(This story appears in the 05 June, 2009 issue of Forbes India. To visit our Archives, click here.)