Thursday, 18 October 2012

From Booze to Boos, may sell out to Diageo Kingfisher Airlines's Dr Vijay Mallya




Once upon a time, Dr Vijay Mallya, the CEO of United Breweries and the owner of India's flagship Kingfisher beer, styled himself as "the king of good times" -- a sort of Hugh Hefner meets Richard Branson, with a swimsuit calendar, an airline, and more gold chains on his hairy exposed chest than the 1980s version of Mr. T.

Oh how the mighty have fallen.

Last month, the liquor baron who (if truth be told) made most of his fortune when he enjoyed a near-monopoly in the beer- and whisky-business of so-called "Indian Made Foreign Liquor" (IMFL) was dubbed "India's worst businessman" by FirstPost.in. And as his ego-driven Kingfisher Airlines continues to bleed cash, and employees threaten to sue him for back pay, now it appears that the one-time monarch will only be able to keep his (unbuttoned to the navel) shirt by selling a controlling interest in the crown jewel of his liquor business to Diageo, as the Times of India reports Wednesday.

According to the paper, Mallya is close to inking a deal to sell his 25 percent controling interest in the UB Group's United Spirits unit to the British liquor giant, giving a major leg up to a foreign competitor that's thirsty to drink up the fast growing Indian booze market. After the deal, Diageo will own 25 percent in the company to Mallya's 15 percent -- which will no doubt be a great thing for investors.

Meanwhile, India's Mail Today newspaper wonders if this is only the beginning. India has no bankruptcy laws, so Mallya has no way out of his plunging airline business.  Or, as the paper writes: "The question is how many Vijay Mallya group balance sheets can be de-leveraged through this modus operandi."

How did we get here from the days of parties on the Kingfisher yacht, dreams of hawking microbrews in the US, the Formula One team, and so on?

In a stellar long read on how the liquor business built the city of Bangalore -- long before the IT industry came to town -- the Caravan's Raghu Karnad recounts "how beer, arrack, rum and whiskey—and the companies that made them—irrigated the growth of Bangalore from a quaint colonial outpost to a regional capital, and onwards to the promised land of the globalisation era."

Telling of the King of Good Times' savvy father, he offers a subtle critique of his devil-may-care style of doing business.

In 1947, Vittal Mallya had been the young director of United Breweries Limited, in Madras. He bought up company shares from departing Englishmen, so that in the year that India became independent, UB moved from British to Indian hands, too. After that, the corporate history of UB developed in step with the history of Bangalore. In 1952, the year Bangalore became the legislative capital of Mysore State, UB’s headquarters were moved here, to the grounds of the Bangalore Brewery. In 1956, the year Karnataka was born, so was its best recognised export: Kingfisher.

Vittal Mallya was “like a quiet chartered accountant”, said one senior state bureaucrat, a numbers man with a receding hairline and a demure personality. It is a piece of UB lore that when his son Vijay lost a one paisa coin while playing, his father made sure to make a note against his account. After Vittal Mallya’s death, Grant Road, the street where his brewery sits, was renamed in his honor. But it was appropriate for other reasons too: Vittal Mallya Road was a wealthy area, as central as could be, yet it was quiet, low-profile and of a piece with an earlier Bangalore.

Contrast that to FirstPost.in's send-up of the modern liquor baron.

Point 1: There's a reason that Jack Welch wears a suit, not a bunch of gold chains.

Hubris: Mallya’s Kingfisher foray had all the wrong reasons for entry and staying the course to disaster. He entered the business for the glamour it brought to his portfolio (which is why, in any Kingfisher flight, Mallya talks to you directly on the video), rather from any special understanding of competitive advantage. He wanted to be India’s Richard Branson, forgetting the success is not easily copied.

Point 2: Just because you can run a near-monopoly, selling a recession-proof product, doesn't make you a business genius.

[Mallya] failed to understand the difference between running a business with 25-35 percent margins (booze) and one with 1-2 percent margins, or even losses for long periods of time (aviation). He failed to see his managerial limitations in this newbusiness where he didn’t have a clue on how to run it.

Point 3: When everybody thinks you're crazy, it doesn't necessarily mean you're "thinking out of the box."

Denial of risk: It is one thing to blunder into an unprofitable business, quite another to bet the farm on it. But this is precisely what Mallya has done. He has staked almost his entire liquor business to save a sinking airline. Today, if Mallya is talking to Diageo to sell a stake in United Spirits, it is largely because he has pledged too much of his liquor business and his personal assets to keep Kingfisher afloat. He threw away his good business to rescue the bad. Did Mallya not understand, at least as late as 2010-11, when everyone knew how the aviation business was going down hill?







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