IT IS is a great idea. But great ideas often come with inherent execution risk. Hotstepper VJM or Vijay Mallya, buoyed by the recent successes in cricket – Royal Challengers, and Formula 1 – Force India, is contemplating a consolidation of all his sporting assets under the aegis of UB Sports to finally unlock value through a public float.
The beleaguered liquor and aviation baron has been in a spot of financial bother lately. His cheques to domestic oil marketing companies even bouncing on occasions. He owes them approximately Rs 9.5 billion. Trying desperately to raise resources, he tried his hand at selling a strategic stake in United Spirits also, but to no avail as Diageo fled on valuation concerns.
But VJM is a fighter. He has proved all his detractors wrong many times. When his father Vittal Mallya passed away, many thought that the flamboyant playboy Vijay would not be able to get a handle on things. But Mallya is canny and a street fighter. He divested many businesses and focused on his core of liquor. I remember him telling me that he wasn’t a corporate museum and that business required hard decisions and he was capable of taking them. This streak has served him well as he has grown from strength to strength in his liquor business. By acquiring long time rival Shaw Wallace and Co and pouching Whyte & MacKay for an astronomical Rs 60 billion, Mallya garnered real mass and muscle in his core competence.
Every businessman makes a judgmental error sometime or the other. VJM’s error came when he entered the aviation business to fly the good times in sync with his credo of making it large. It has turned out to be a business on a wing and prayer for Mallya who went against his own underpinning of focusing on his core competence. Aviation is a cut-throat business, even deep pockets cannot sustain in a downturn. It is a tough and unrelenting business which doesn’t give you any room to manoeuvre.
VJM fell for the sucker punch and has bled profusely. A combination of a crude spike and an economic meltdown has meant that he has to scramble all his resources to keep the airline from going under. An acquisition of low cost carrier Air Deccan added to his woes. Huge losses have meant that he is neck deep in debt and servicing interest costs have ballooned the sums further. For the financial year 2008-09, Kingfisher Airlines reported a net loss of Rs 16.08 billion ($ 335 million). This year, it could be twice that. Things got so bad that he became part of an airline rump which asked for a government bailout. VJM and other airline wannabes want aviation turbine fuel to be made a declared good, so that the incidence of inordinately high excise and sale tax in the states is reduced. They even threatened a strike, but then realised that the government would have none of it.
In all this gloom and doom, VJM has managed to turn the tide with his array of sporting properties. Royal Challengers made a fist of it and reached the final of the IPL while the languishing Force India franchise in F1 has managed two successive good showings in the recent past. Emboldened, VJM is planning a consolidation of all the arrows into a common quiver. So Royal Challengers, Force India, his 50 per cent stakes in football clubs East Bengal and Mohun Bagan have to come under the common umbrella of UB Sports. Easier said than done. Does he
want to do an IPO or bring in a financial investor? Well, we will have to wait for the mechanics are still being worked out.
VJM wants to do this because he finds that investors are queuing up for a piece of his sporting properties. But he finds that his sporting assets are spread around the group and as such are not unencumbered.
VJM has advisors working on this consolidation move and he wants complete compliance with domestic regulator Sebi before going ahead. His target – first quarter of next year. He also wants the Force India franchise to be majority Indian owned. Mallya is pragmatic and he understands that whatever he does should conform to the law of the land. On his lavish lifestyle, VJM had told me once while flying to Kolkata to watch the Indian Derby that he was personally extremely wealthy and he didn’t need to use company resources for these extravaganzas. The harsher reality is that VJM is cash strapped these days, maybe not personally, but his airline business is bleeding him daily.
A consortium of Orange India Holdings Group comprising VJM and the Netherlands-based Michiel Mol family bought Spyker and renamed it Force India in 2007 for 88 million Euros. Which means that it is parked outside the ambit of his group companies. Royal Challengers cost him $ 111.6 million and this is directly owned by flagship firm UB Group. Similarly Kolkata based football clubs Mohun Bagan and East Bengal are 50 per cent owned by United Spirits and United Breweries.
As I said, VJM is a competitor, with a never say die attitude. A former car racer himself, he would particpate in the Barrackpore races. Mallya has interests in horse racing, F 1, cricket and football. They go well with his persona and brands like Kingfisher and McDowell.
To transfer all his sporting assets will not be easy as he will have to unseat them from various heads and bring them together. Once he restructures all the assets and consolidates them, only then can he contemplate a listing or the entry of a financial investor. My sense is that everyone is waiting for the auction of the two new franchises in IPL early next year as it will provide a clue to what the valuation of a new entrant is. This by itself will raise the bar for the valuations of existing players. So, we know that Deccan Chargers is planning to do a listing after the auction. Mallya too may be targeting a similar thing. With Lalit Modi saying that the base price will be in the vicinity of $ 200 to 250 million, the door lies ajar for an exciting time ahead. The podium and near podium finishes will help him improve the valuation of Force India. Further he would want to buy out Mol and family from his team so that it becomes Indian owned.
