The Last Bastion Of The King.

     Once upon a time, in a land not so far away, there lived a mighty King who reigned supreme over a massive and wealthy kingdom. The UB empire, powered by beer and booze, was one of India’s most successful, powerful and valued conglomerates but its King was not content. For, the King harboured a dream of giving his empire a pair of wings. So, in the year 2005, he launched his most ambitious venture till date. It was an airline that was named after his flagship beer brand, Kingfisher. However, after a turbulent flight that lasted seven long years, Kingfisher Airlines metamorphosed into the entity that turned out to be the King’s undoing. An unsustainable business model, an expensive acquisition of the loss-making low-cost carrier Air Deccan, a much-too-early debut in the international skies and an over-ambitious plan to be the King of the skies all combined to send Kingfisher Airlines crashing down. But this tale does not end with the King living happily ever after and just like that old saying goes, uneasy lies the head that wears the crown. For, Kingfisher Airlines was fuelled all along by debt and its grounding did not mean that its creditors would simply walk away and forget all about their pound of flesh.
     Following the grounding of the airline, Kingfisher’s bankers, who had lent over Rs. 8000 crores to the airline, waited patiently for several months for Mallya to pump in money and put Kingfisher back in the skies again. Money, however, was not forthcoming from the UB Group’s coffers and no foreign carrier would even dare touch Kingfisher Airlines with a bargepole. A massive chunk of United Spirits shares and the Kingfisher Airlines brand itself, perhaps the most sacred asset of the airline, were already pledged to the banks, which had the option of invoking the pledges. With time running out, the pressure on Mallya to either restart or liquidate Kingfisher Airlines began to grow and as each day passed, his bankers were running out of patience.
     In November 2012, in what was widely perceived to be a drastic fund-raising move for his airline, Mallya offloaded a 27% stake in United Spirits to Diageo to raise close to Rs. 3000 crores (this deal, if I may add, was accurately predicted by yours truly, months before it happened, in my Facebook article ‘The Curious Case Of Kingfisher’). The sell-out, which was seen as Kingfisher’s beacon of hope, turned out to be a red herring, as not a single rupee went towards putting Kingfisher back in the skies again. It was but a ploy by Mallya to bide his time, in the hope that a foreign carrier would invest into Kingfisher and bail it out. But sometimes, even the best-laid plans go awry and in this case, that was precisely what happened.
     Kingfisher Airlines did not find a suitor willing to be the wind beneath its wings and now, the King is on the hook for over Rs. 8000 crores. Kingfisher’s lenders have started recalling the airline’s loans and they seem to be closing in on the Kingfisher Airlines brand, which has been pledged against KFA’s loans. The airline’s brand is valued at close to a billion dollars and along with Mallya’s personal guarantees, it would go some distance in settling the banks’ loans to Kingfisher Airlines. KFA’s bankers are already considering the possibilities of invoking the personal guarantees and putting the brand on the block. The problem, however, would be to find a buyer for the airline brand. Even though it does boast a lofty valuation of close to a billion dollars, the brand itself, along with the eponymous airline, is virtually dead. As far as Mallya is concerned, he may have just one way to come up with the required funds but that option may turn out to be his ultimate sacrifice.
     Heineken, the Dutch brewery behemoth, and Mallya have a 37.5% stake each in United Breweries and Heineken has already signalled its willingness to acquire UB from Mallya. Over the past 2 months, the UB stock has been cascading due to the persistent fear that the Kingfisher beer brand has been pledged as collateral against Kingfisher Airlines’ loans. However, these fears are entirely unfounded as the Kingfisher beer brand, contrary to popular belief, has not been hypothecated and it lies firmly in the stables of United Breweries. The banks have a claim only on the airline brand and not on the beer brand. The deal with Heineken may happen at a price anywhere north of Rs. 900/share (as against a current UB stock price in the range of Rs. 800). In the event of Heineken gaining unrivalled control of UB, it is sure to delist the company from the Indian bourses and considering the way that events are already starting to pan out, it may just be a matter of time before that happens. A sell-out from UB by Mallya would enable him to raise close to Rs. 8000 crores, which would help meet KFA’s dues and shut down the airline once and for all. Or, it would give the King enough funds to resurrect Kingfisher Airlines and have another shot at achieving his unfulfilled ambition of being the King of the Indian skies.
     In spite of everything, Mallya has categorically stated that Kingfisher Airlines will be flying again this summer. However, a large-scale employee strike, an expired license, a revival plan with no clarity on the source of funding and a recent Rs. 7500 crores loan recall by the banks all combine to throw a spanner in the works. Today, the surviving aircraft of Kingfisher Airlines sit forlornly on the tarmac at airports across the country, with their cockpit windows covered, their tyres chocked and their engines baby-jacketed. At the end of the day, all the King’s horses and all the King’s men may not be able to put his airline together again.
     With Rs. 8000 crores of debt hanging in the balance, Mallya is running out of both time and options. Selling UB to Heineken would give him the funds that the situation demands but the decision to walk away from United Breweries certainly won’t be an easy one to make on his part. For now, KFA’s bankers seem to be licking their wounds and circling but if Mallya does not infuse cash into his airline soon, it may not be long before they storm his gates. If... no, not if... when that happens, Heineken will seize its opportunity to pounce and United Breweries, the last bastion of the King, will crumble to the ground. 


Comments

Post a Comment

Popular posts from this blog

PVR Cinemas: Showdown On The Silver Screen.

Image
     As the sun threw its rays across the early morning sky, the board of directors of PVR Ltd. was in a closed – doors meeting at the company’s Gurgaon headquarters. Over the past few months, rumours had been doing the rounds of the markets that the Anil Dhirubhai Ambani Group’s (ADAG) subsidiary company, Reliance MediaWorks was looking to offload a controlling stake in its multiplex operator, Big Cinemas. Big Cinemas, however, was a loss – making company and its acquirer would have to turn it around for the acquisition to be value – accretive. Wild speculation had surrounded the entire episode but in September 2014, some clarity emerged when ADAG invited bids for Big Cinemas. PVR, hungry for growth and expansion, had thrown its hat into the ring, along with some other biggies such as INOX Leisure, Carnival Films, Provident Equity Partners (a US – based private equity firm) and Navis Capital (a Malaysian private equity fund).      Two days ago, PVR’s board had approved a $81
Read more

Ricoh: A Fraud's Story.

Image
     Yes, you’re right. The title does seem similar to that of one of Richard Gere’s finer movies, Hachiko: A Dog’s Story (or the subsequently abbreviated Hachi: A Dog’s Tale). The similarities, however, between the Akita and the Japanese giant, Ricoh end there. For, while Hachiko was loyal to his master until his last dying breath, Ricoh’s Indian subsidiary didn’t exactly share that trait. In fact, as the past few years have evidenced, Ricoh India has lost no occasion to rip off its shareholders and leave them high and dry.      When it comes to high standards of corporate governance and good management practices, Japanese companies have always been placed on a pedestal and managed to live up to their high standards. All that, however, has changed over the course of the past decade. Be it Toshiba’s overstated profits, Olympus’ fishy acquisitions to brush its investment losses under the carpet, Mitsubishi’s fuel economy scandal or even Takata’s widespread recalls following its f
Read more

Bucks, Balls and The Beautiful Game.

Image
     If there’s indeed a global sport in which money talks, football would be it. Lucrative contracts, sponsorship deals, stadium naming rights, multi-billion Euro television broadcast rights, player transfer fees and merchandise sales all portray the grip that money has gained on the game. And if there was money to be made, it was only a matter of time before private equity came calling.      Now typically, sports franchises don’t have the trappings of a typical private equity investment. Returns, after all, are difficult to come by. Sports franchises are expensive to acquire in the first place and need perennial cash infusions to meet their season expenses and contract bids. With revenue streams being largely lumpy and seasonal, building a steady non-game revenue stream needs heavy marketing and brand building. Broadcasting revenue and merchandising provide some stability and predictability, while fans’ club loyalty is a powerful adhesive. Even then, most teams swing from profits to
Read more