Price of Vanity
Kingfisher has crashlanded. The UB Group could be next. But the high-flying Vijay Mallya Refuses to accept that his business model is to blame for the present crisis.
Vijay Mallya refuses to accept it’s his business model that is to blame for the present crisis.
Once upon a time Vijay Mallya believed his dream business, an airline, would catapult him from tycoon to trillionaire. Six years after he launched Kingfisher Airlines in 2005, its troubles have become a gangrene that could infect the entire UB Group. Mallya’s cash-rich liquor business has been drained before for glamorous acquisitions and lifestyle needs. But that was a manageable burden. An airline is too heavy a load.
Mallya is eloquent in his litany of reasons for the crisis. He blames everyone and everything—bar himself. But analysts know and creditors are learning that the real problem is Mallya’s ill-conceived business plans. His foray into the airline business has cost the shareholders of UB’S holding company, shares of which are currently trading at Rs 82, almost four times lower than their 52week high of Rs 315. This is the price paid for vanity management. According to a former airline head, his obsession to vanquish Jet Airways at any cost is responsible for his debacle. He says, “Mallya’s problems are self created. You cannot keep changing the business model, there are cost implications involved. A one-point agenda cannot be the basis of your business proposition.”
Mallya needs someone to rescue him urgently. By how much? For how long? His pride has stopped him from asking the Government for a bailout. Banks are reluctant, having already offered him a generous package in March
2011, when they converted a substantial portion of debt into equity at a premium that raised more than one question. But there are potential saviours. The Tatas have reportedly made an offer, valuing the company at Rs 30 a share. That is a 50 per cent premium on Kingfisher’s share price in the second week of November but is well below the Rs 81 mark that Kingfisher recorded in November 2010. Mallya has spoken to Reliance boss Mukesh Ambani to explore his interest. So far, Ambani has formally denied any inclination to buy into the struggling airline. INDIA TODAY has learnt that the white knight may well be an Indian business group flush with cash which also owns a private equity fund of substantial size. Mallya has someone lined up. He told INDIA
TODAY after his press conference in Mumbai on November 15 that “if I was asked a direct question—have you received a direct offer from an Indian investor—the honest answer is yes.”
is speculation that Sahara promoter Subrata Roy, who bought into Mallya’s Formula One team earlier this year, may be interested in making a comeback to aviation after selling out to Jet Airways in January 2006. But Roy has burnt all ten fingers in the airline business before. What seems clear is that Mallya will sell a majority stake in the airline, subject to the regulatory framework, but retain a minority presence. UB Group Chief Financial Officer Ravi Nedungadi dropped a hint: “Majority stake is not key.” Still, Mallya would like to retain control over Kingfisher, even if he cannot keep control over its shares.
The uncertainty has taken a toll on employees of the airline, many of whom have lost their sense of job security. At Kingfisher’s Bangalore office, the word is out that austerity measures are going to be put in place. “We are functioning without knowing who will lose his job or when. Our superiors have told us that they think the airline will continue to operate, but there will be financial tightening and reduction in employee numbers,’’ a Kingfisher employee says on condition of anonymity.
The situation has not reached panic levels yet, but almost all employees are on
the lookout for jobs in other airlines or in the hospitality industry. Salaries for the month of October have been held up, while some haven’t got even their September salaries. There are indications that privileges like family travel on Kingfisher at nominal cost or pickup and drop facilities for pilots and crew are likely to be cut. “We are watching the situation, hoping something will work out,” an employee says.
Senior officials and friends of Mallya are trying to sound upbeat. His business partner Irfan Razack, who constructed UB City, where the UB Group has its headquarters, maintains the King of Good Times will pull it off. “He is an intelligent man who works to a gameplan. He built an international-level airline from nothing. Mallya has put a lot of passion into this airline, I don’t think he will give up easily,’’ he says.
Nedungadi, “We are optimistic. We recognise that the situation is tough and are alive to the challenges. But I don’t think we are fazed by it.” He adds, “We are in high spirits. We have gone through a tough quarter and two other airlines have combined losses of Rs 950 crore for this quarter alone. Kingfisher is relatively better off.’’
In reality it isn’t. While Jet Airways lost Rs 713 crore in the period between July and September 2011, compared to Kingfisher’s loses of Rs 469 crore, it has been in better financial shape for longer. In the financial year 2010-11, when Kingfisher made losses of Rs 1,027 crore, Jet had recorded a loss of only Rs 86 crore. Kingfisher has not made an annual profit in a single year since 2005. Jet Airways has had several years of profit. The low-cost carriers Indigo and Spicejet have also shown profits, even if the last six months have been a struggle ( see box). There seems to be something fundamentally wrong in Kingfisher’s business model which has never allowed it to make a profit, operating in the same market and under the same conditions as other airlines. The problem of high taxes on aviation fuel, high user charges at airports and compulsory flying on
unprofitable routes affect all airlines equally. Also Mallya knew that all these constraints existed when he started the airline. So he should have tailored the business to the conditions.
observers are pessimistic about Mallya and Kingfisher’s prospects. Says former joint secretary, civil aviation, Sanat Kaul, “I think he is in too deep. He is now trying to secure foreign equity permissions through a change in FDI rules. The banks already own 23 per cent, he is in a cul de sac.” Veritas Investment Research in a scathing recent report titled A Pie in the Sky stated, “UB Holdings, parent of Kingfisher Airlines, is teetering on the verge of bankruptcy and incidentally so is Kingfisher Airlines.”
If the business model is wrong, there is a question mark over the effectiveness of pouring money into the airline. A consortium of 13 banks led by SBI and ICICI has learnt this the hard way. In March 2011, the consortium agreed to convert Rs 1,300 crore of Kingfisher’s debt into equity at a price of Rs 64 per share. The price was cal- culated in compliance with a SEBI rule which requires all conversion of debt into equity to take place at a six-month weighted average of the share price. Mallya got lucky. The six month price of Rs 64 was a 61 per cent premium over the prevailing share price of Rs 40 at the time the debt was converted into equity. The banks could have still said no to the deal but they went ahead with the conversion of debt into equity. The share price has sunk further to around Rs 20 eight months later, exacerbating the losses suffered by the banks. The six top banks in the consortium forked out Rs 596 crore for shares worth Rs 195 crore at current prices. The banks suffered a double whammy because in addition to equity they have also financed Kingfisher through loans. Their total exposure is around Rs 7,000 crore. Recently downgraded by global rating agency Moody’s for rising non-performing assets, the banks are unwilling to put in any more money unless Mallya infuses promoter equity.
SBI Managing Director Hemant Contractor told the World Economic Forum in Mumbai on November 13 that the banks expected Mallya to infuse at least Rs 800 crore.
Kingfisher’s balance sheet shows that Mallya has put in substantial equity into the venture. Over the last six years, he has leveraged personal equity of Rs 3,593 crore in the airline with banks who have committed Rs 7,057 crore in loans. In the last 12 months alone, Mallya has put in Rs 780 crore of his own or associates, of which Rs 150 crore came in the last month.
The UB Group is suffering. The performance of six of its listed companies has been seriously impaired by the focus on Kingfisher. Its market capitalisation has halved from Rs 45,134 crore to Rs 21,308 crore. The perception in UB City is that Mallya will not sell his yachts and horses or the Royal Challengers IPL team to shore up the airline. That would mean giving up his much-cherished image of flamboyance. Instead, he will likely exit the airline business to focus on the others. Says a source close to Mallya, “His liquor company United Breweries is still a safe bet, with good market share and muscle. He may not be able to save Kingfisher Airlines, but otherwise he will be fine.’’ That, of course, if Mallya keeps his vanity aside to do a deal on buyer’s terms.
VIJAY MALLYA POSES FOR A
PHOTO-OP IN OXFORD, UK