A bail-out

Mallya has impressed his bankers and lenders.

Tennyson famously said that the shell must break before the bird can fly. Though the baron wouldn't have Kingfisher Airlines in mind, it’s clear that the carapace of unintelligibility enveloping Kingfisher’s mothership United Breweries (UB) has crumbled with British liquor giant Diageo stepping in as white knight investor. Some would argue that UB Chairman Vijay Mallya had more of Tennyson’s restless Ulysses within him and less of UB Group founder Vittal Mallya, but the former has a chance to extract stability and long-term value from the Rs 11,166-crore agreement for a 53.4 per cent stake sale to Diageo. Whilst the spirits deal is uplifting for UB, it won’t be a scratch on Kingfisher’s debt of over Rs 13,400 crore, of which accumulated losses are about Rs 10,250 crore. United Spirits Ltd (USL) alone has foundered under debt of Rs 8,300 crore.

Mallya’s assertion that investing the Diageo deal money in USL's growth holds water only if that “growth” ties in with deploying a majority of the proceeds into settling USL's liabilities. A good start to the Diageo partnership has been made with both parties entering into a joint venture which will own the sorghum beer business of United National Breweries in South Africa. Diageo expects the Indian spirits market—at 260 million cases annually and world's largest whisky market by volume -- to become its second largest market after the US. This expectation was backed by Diageo’s determination to go ahead with the deal to help it speedily expand its whisky business and catch up with rivals like Kishore Chhabria's Allied Blenders and Distillers and France's Pernod Ricard, who have since 2009, made inroads into Mallya’s traditional hunting grounds.

Mallya secured a Rs 1,440 per share offer from Diageo, a 6 per cent premium over its Friday closing price. The Rs 11,166-crore offer is a 20 times multiple of USL's EBITDA in fiscal 2012. An expensive buy, even accounting for the debts of UB's listed (and unlisted) holding companies. With the cost of capital for Diageo being 12 per cent in this deal, it will take six years to yield returns on investment. Hence,there is good reason for the maker of Johnnie Walker to expect USL to perform at superlative levels. A newly sobered Mallya may have lost his crown jewel, but has impressed his bankers and institutional lenders. His chances of impressing Diageo's shareholders are bright as well.