Mallya Distiller Sale Seen Falling Short of Kingfisher Needs

Vijay Mallya’s sale of a 36.3 billion rupee ($664 million) stake in liquor unit United Spirits (UNSP) Ltd. may not be enough to resolve the cash crunch that forced his Kingfisher Airlines Ltd. (KAIR) to stop flying.

The Indian brewing tycoon and others agreed to sell 19 percent of United Spirits to London-based Diageo Plc (DGE) on Nov. 9 as he seeks funds for the airline. Diageo also intends to buy another 34 percent of United Spirits, the maker of McDowell’s No. 1 whiskey, to gain a majority.

While the deal eases some of the financial pressure on Mallya, who lost his billionaire ranking at Forbes last month, it falls short of the $1 billion that Kingfisher’s biggest lender has said the carrier needs to raise. The unprofitable airline halted operations last month after failing to pay wages because of an 86 billion rupee debt pile.

“The Diageo deal doesn’t fundamentally move the needle an inch,” said P. Phani Sekhar, a fund manager in Mumbai with Angel Broking Ltd. “Even if the entire proceeds from the deal is plowed into Kingfisher Airlines that would hardly be enough to erase existing debt, let alone any question of infusing fresh equity.”

Mallya, speaking on a conference call following the United Spirits sale, declined to comment on what the deal means for Bangalore-based Kingfisher Air, which is named after his flagship beer.

Stake Sale

Mallya has been seeking to sell a stake in the carrier for at least a year because of losses caused by price wars, debts and rising fuel costs. The airline has also cut flights, delayed new planes and returned other aircraft to lessors to pare costs.

The carrier stopped flying Oct. 1 after staff walked out because of unpaid wages. They subsequently agreed to return after management pledged to make payments. In the meantime, the Directorate General of Civil Aviation suspended the carrier’s operating license.

Kingfisher is working on a turnaround plan and expects to resume services in “the near future,” it said in an earnings press release last week. The airline, which began flying in 2005, reported a wider net loss of 7.54 billion rupees for the quarter ended September.

Diageo Deal

Diageo will buy new and existing shares in United Spirits at 1,440 rupees apiece. That’s a 5.8 percent premium to the Nov. 9 closing price. Mallya’s UB Group will continue to hold 15 percent and he will remain as chairman, according to a statement. The deal gives Diageo, which already sells Johnnie Walker whiskey and Smirnoff vodka in India, control of the largest distiller in the world’s biggest whiskey-drinking nation.

United Spirits, which also owns brands of Scotch including Whyte & MacKay, rose by a record 35 percent in Mumbai trading to 1,832.95 rupees. Kingfisher Air climbed 4.4 percent to 14.10 rupees.

The airline has dropped 35 percent this year, cutting its market value to $207 million, according to data compiled by Bloomberg. Jet Airways (India) Ltd. and SpiceJet Ltd., the nation’s two other listed carriers, have both more than doubled, partly because Kingfisher’s flight cuts have helped them boost sales. Jet’s domestic revenue jumped 35 percent in the quarter ended September.

Formula One

State Bank of India Chairman Pratip Chaudhuri said Nov. 7 that Kingfisher should eventually raise $1 billion of fresh capital. Some of that will have to be found this month, he said, without saying how much or giving a timeframe for raising the full amount.

Kingfisher’s founders have contributed 11.5 billion rupees to the company since April 1, Mallya told shareholders at its annual meeting Sept. 26. The airline has 10 airworthy planes, down from 66 in the year ended March 31, 2011, Arun Mishra, the director general of civil aviation, said last month.

Mallya, who also has a stake in a Formula One team and owns an Indian Premier League cricket team, had guaranteed $1.1 billion of Kingfisher debt as of March 31, according to the company’s annual report. The carrier had slumped from second to sixth in terms of domestic market share because of flight cuts and service disruptions caused by unpaid bills.

UB Group will invest in Kingfisher Air to help revive operations, an Indian government official said Oct. 26, after a meeting between the regulator and the airline’s chief executive officer. The carrier must prove it has adequate funds to pay airports, fuel suppliers and other vendors before the license suspension can be lifted, said the official, who declined to be identified citing rules.

“It looks like it will be a difficult proposition to revive the airline,” said Jagannadham Thunuguntla, New Delhi- based chief strategist at SMC Global Securities Ltd. “The airline business is arguably one of the toughest businesses to run in the world and Kingfisher is no exception.”

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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