Why would Mallya sell cash cow UB to save Kingfisher?

If reports are to be believed, Vijay Mallya- the king of good times, liquor baron and chairman of debt-laden Kingfisher Airlines- is looking to sell his personal stake in cash cow United Breweries to save the dying airline business.

Even though giving up control of his flagship business would signal his commitment towards reviving the airline, what’s bothering investors is why would Mallya sell part of his stake to Dutch beer major Heineken, which already owns a 37.5 percent stake in United Breweries just to bail out a zero-value airline that should technically file for bankruptcy.

One one hand Kingfisher Airline has a debt over Rs 7,000 crore and is making losses of around Rs 6,000 crore. Even its lenders have refused to provide any fresh loans or even restructure its old assets that have been termed as bad loans by all lenders. On the other hand, there is United Breweries, a profitable business which has almost a 50 percent market share in the domestic beer market . The maker of Kingfisher Beer, after which the airline is also named, has seen average sales growth of 30 percent over the past five years, three times that of the industry average.

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[caption id=“attachment_260757” align=“alignleft” width=“380” caption=“Vijay Mallya, chairman and chief executive of Kingfisher Airlines”]  [/caption]

While, the share sale would get much-needed funds to inject into the airline, which has been struggling after tax authorities froze its bank accounts last month, it does not explain why Mallya would suddenly throw so much good money after bad money.

Is it because Vijay Mallya, who launched the high profile airline is 2005 with the aim to use the platform to promote his best-selling Kingfisher beer, needs to still live up to his brand? Or is it because Kingfisher’s loans are secured in part by a combination of guarantees by the UB group, as well as Kingfisher shares, Mallya’s personal guarantees, Mumbai real estate assets and the Kingfisher brand itself.

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As a Firstpost article noted earlier, “Mallya was clear that since his core liquor business had serious constrains in terms of advertising, the airline would also be a major extension which would be hugely beneficial for Kingfisher as a brand. Having launched what he thought would be India’s dream airline - with a firm belief that only he could make that happen - Vijay Mallya has put his entire reputation on the line this time.”

Moreover, if Kingfisher fails, all UB Group companies will be in trouble too. Debtors will go after the alcohol giant to recover their money, further diminishing Mallya’s sheen, which he can no longer afford. A bankruptcy will force the airline’s lenders to invoke the guarantee and sale of the pledged shares of the liquor and beer business could follow, a scenario that Mallya will do anything to avoid.

According to a report in the Economic Times, “Mallya’s urgency stems from the enormous pressure being applied on him by banks to bring in equity and save Kingfisher Airlines from almost certain bankruptcy… Banks, which have lent the airline over 7,000 crore have refused to give more money unless the promoters bring in money of their own.”

Currently, Mallya is looking to offload around 12 to 13 percent stake in UB, which will fetch him around Rs 1,700 crore. But if the deal goes through Heinekin will become majority stakeholder in UB group, with a 50 percent stake.This, however, is a major step back for Mallya who had earlier resisted all efforts by Heineken to acquire controlling stake in UB Group.

Perhaps saving the airline even at the cost of his alcohol assets, can still save the man some pride?